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Netflix falls as analysts doubt subscriber target

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April 24, 2012 02:35 PM EST | AP


LOS ANGELES — Netflix Inc. shares tumbled in midday trading Tuesday as analysts expressed doubt that the company will reach its goal of adding 7 million subscribers to its streaming video service in the U.S. this year, especially with subpar growth in the first half.

THE SPARK: Netflix's first-quarter loss was largely overlooked but its subscriber forecast wasn't. Despite saying it will add 7 million U.S. streaming video subscribers by the end of the year, the company added just 1.7 million in the first three months of the year and foresees a gain of 800,000 in the second quarter.

That means it will have to add 4.5 million subscribers in the last half of 2012.

Wedbush analyst Michael Pachter, who has an "underperform" rating on the stock, called the subscriber guidance "unrealistic."

Janney analyst Tony Wible, who rates Netflix "sell," said the new target will unnerve investors. "Investors will see this as increased risk and a possible sign of maturity and/or competition," he wrote in a research note.

Barclays analyst Anthony DiClemente said slowing sales of video game consoles – which are proving to be a vital way of gaining Netflix subscribers – casts doubt on the company's ability to reach the goal.

"We believe increased competition and a lack of tailwinds from video game console proliferation and video store closures layer in additional risk to that 7 million target," he wrote.

THE BIG PICTURE: Netflix says it is transitioning into an online video streaming company from a mail-order DVD rental shop. It ended March with 26.1 million subscribers in the U.S., including 10 million who are DVD customers. Internationally, Netflix says it has 3.1 million subscribers, up from 1.9 million at the beginning of the year. The company's profits are dependent on its ability to keep the cost of licensing content and paying for original shows below its revenues.

THE ANALYSIS: Analysts are not very bullish on the company's shares. Wible has a $70 fair value estimate. Pachter's price target is $45. DiClemente, who rates the stock "equal weight," has a price target of $95.

SHARE ACTION: Shares fell $14, or 13.75 percent, to $87.84 in afternoon trading. That's down from nearly $300 per share in July last year when the company announced an unpopular price hike, but above its lowest close in 52 weeks of $63.98 reached in late November.