TECH
10/24/2012 09:58 am ET Updated Dec 24, 2012

Netflix Competitors To Make Times Tough For Streaming Movie Service: Analysts

(Reuters) - Netflix Inc will struggle to attract more customers in the United States as competition is expected to intensify in the next few months, analysts said.

Netflix said on Tuesday it added fewer-than-expected U.S. customers in the third quarter, forcing the company to cut its full-year subscriber forecast.

Shares of the online video streaming company tumbled 16 percent to $57.40 on Wednesday, making the stock one of the top percentage losers on the Nasdaq. More than 8 million shares had changed hands by 1130 ET.

"The lower numbers should lead investors to question the total addressable market, especially as this slowdown is in an ideal environment lacking material competition that will likely soon emerge," said Janney Capital Markets analyst Tony Wible.

"Every subsequent quarter has the potential to intensify the competitive risks," said Wible, who cut his price target on the stock by $5 to $48.

Other analysts cut their price targets by around $5 to between $48 and $65. BMO Capital Markets slashed $22 off its target to bring it in line with the top of that range.

Wible pointed to a possible rival product from Apple Inc, and the expected fourth-quarter launch of video services by Verizon Communications and Coinstar Inc.

The Netflix stock, which at one point was trading at around $300, has hit several hurdles over the past year mainly over the cost of acquiring movies and TV series from media companies as well as stiff competition.

The stock has fallen about 45 percent since February when Coinstar's Redbox unit and Verizon said they have formed a joint venture to sell video services.

In a note titled 'No catalyst/No cure,' Stifel Nicolaus analyst George Askew said Netflix's business model was broken as the streaming business lacks barriers to entry and has no subsidy.

"Aggressive companies like Amazon, Verizon and Comcast have set their competitive sights on the online streaming business and have other revenue sources to subsidize it," Askew said.

"We believe fiscal year 2013 will be another eventful and probably frustrating year for Netflix."

CASH BURN

Analysts said the company's profitability will be hurt as it expands aggressively in international markets.

Netflix is also spending more on original programming in a bid to attract more subscribers. Free cash flow was a negative $20 million in the third quarter ended September 30 due to its investment in original programming.

The company has said it will continue to burn cash for several quarters but that it does not need to raise money.

"But its recent slip up in guidance, and willingness to spend, creates risk that this view changes," said Lazard Capital Markets analyst Barton Crockett.

Crockett expects the company's cash to fall to $450 million in 2013 from its current $800 million.

Even analysts who have a "buy" rating on Netflix lowered their price targets on the stock.

Pacific Crest Securities analyst Andy Hargreaves, who has an "outperform" rating on the stock, cut his price target by $45 to $85. Credit Suisse cut its price target on the stock by $20 to $80 but maintained its "outperform" rating.

"While we continue to believe Netflix represents an incredibly compelling entertainment value, the pace of adoption of streaming video in general, and Netflix specifically, appears likely to be meaningfully slower than we previously anticipated," Hargreaves said.

(Reporting by A. Ananthalakshmi in Bangalore; Editing by Supriya Kurane)

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