Bad News for NFLX- Bad News for Scamazon too
Netflix tumbles on price cut plan
A slew of Wall Street analysts follow with downgrades
By Bambi Francisco, CBS.MarketWatch.com
Last Update: 9:49 AM ET Oct. 15, 2004
SAN FRANCISCO (CBS.MW) -- Shares of Netflix tumbled more than 40 percent Friday after the company revealed a plan to cut prices and sacrifice profit in order to stay competitive. A slew of Wall Street analysts followed by downgrading the stock, but some indicated that if the shares fall too far, the company may become an attractive acquisition candidate. The DVD rental firm's stock (NFLX: news, chart, profile) plunged $7.22, or 41 percent, to $10.22.
Netflix gave the warning after Thursday's closing bell at the same time it announced third-quarter earnings of $18.9 million, or 29 cents per share, up from $3.3 million, or 5 cents a share, in the year-ago period. Excluding certain items, such as stock-based compensation, Netflix earned $22.6 million, or 35 cents a share, topping the average analyst forecast compiled by Thomson First Call of 32 cents. Quarterly revenue nearly doubled to $141.6 million from $72.2 million a year before.
The company wrapped up the quarter with almost 2.23 million subscribers. The cost to acquire a subscriber was $36.97, up from $31.81 in the year-ago period. No less than seven Wall Street firms followed by downgrading the stock. J.P. Morgan cut its rating to "underweight" from "neutral," saying that while the company remains the market leader, it is in a shrinking market that suffers from stiff pricing pressure and low customer loyalty.
The firm said, however, that Netflix could become an acquisition target due to its strong subscriber base. First Albany also lowered its rating Netflix, moving to "neutral" from "buy," saying it sees downside risk in the stock price to the "mid- to high-single digits." The broker believes that if the stock does fall to that level, the company would become an attractive takeover candidate, naming Amazon (AMZN: news, chart, profile) in particular as a likely suitor. Smith Barney, WR Hambrecht, Jefferies & Co., CS First Boston, Piper Jaffray also downgraded the stock.
Fending off competition
Netflix warned in a statement that it "expects the business environment to become increasingly competitive in the coming year," cutting its typical rental rate -- three discs at a time, with no monthly maximum -- by about 18 percent to just under $18 a month. In June, the company had raised the price of that standard plan from $19.95 to $21.99.
During a conference call after the earnings release, Netflix said that, due to increased competition, it expected only to break even next year. Analysts had been expecting Netflix's earnings to rise to $1.21 in 2005 from 66 cents this year.
On the conference call, Netflix representatives said that Amazon.com (AMZN: news, chart, profile) was entering the market. "We recently learned from several sources that Amazon.com is likely to enter our market soon," said Netflix's chief executive, Reed Hastings. Amazon.com shares rose nearly 1 percent to $39.40 in Friday trading.
Hastings said that in order to compete with Amazon and Blockbuster (BBI: news, chart, profile), the company would have to undertake moves that "are painful in the short term but will ensure long-term sustained leadership." Among them: Netflix will postpone the launch of U.K. operation and reduce prices effective Nov. 1. No news, says Amazon
In response to Hastings' remarks, Amazon.com conceded that its customers have expressed interest in DVD rentals. "Customers have encouraged us to offer low-price DVD rentals, but we have nothing to announce at this time," said Patty Smith, an Amazon.com spokeswoman. "We recently launched beauty, home and garden, and jewelry, because our customers wanted us to offer these to them."
Amazon.com, which reports quarterly results after the close next Thursday, owns a movie dabatase called IMDB. If Amazon.com were to launch a DVD-rental business, it would be Amazon's first foray into a rental business.
Meanwhile, Netflix made clear that its strategy in 2005 will be to acquire subscribers as quickly as possible, even at the cost of profitability, particularly in the early part of the year. As Hastings put it: "Our strategy for 2005 is to grow as fast as possible while maintaining profitability on an annual basis."
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