With an S&P downgrade, investors can’t agree on Netflix stock

Michelle Clancy ©RapidTVNews | 30-11-2011



With a stock price is hovering around $65, starkly down from a high over the summer of $300, Netflix continues to struggle in the financial markets.

The leading over the top (OTT) video supplier can't seem to quite shake the taint surrounding the cost of its content licensing and the recent subscriber revolt in the face of a 60% rate hike. However, analysts can't seem to agree on exactly how back the outlook is for the streaming giant.
For instance, Standard & Poor's has downgraded Netflix' credit rating from "BB" to "BB-". The downgrade reflects analysts' conclusion that Netflix recent international expansions into Europe and Latin America will cost more than originally anticipated.
The company had earmarked a full $70 million for a planned expansion into Latin America and the Caribbean this fall, for instance, but is speculated to have spent far more than that. In October, it said that it would "pause" its European expansion after kicking off in the U.K. and Ireland in 2012, where it doesn't expect to reach profitability for at least two years. In a letter to shareholders, CEO Reed Hastings and financial officer David Wells, said, "U.K. members will subscribe to Netflix and to other entertainment offerings. We have to attract and retain subscribers efficiently enough to be able to generate a profit. By pausing on further international expansion and halting buybacks, our current cash on hand is adequate to support the growth of the business."
Also at issue is the decision to raise the price of its core DVD+ streaming service, from $9.99 to $11.99, which began 1 September. The decision was made to help bolster shrinking margins. But in the wake of that controversial decision, which Hastings admitted was communicated badly to customers, it closed out the third quarter with 23.8 million U.S. subscribers after losing a staggering 800,000 disgruntled subscribers.
Susquehanna Financial Group analyst Vasily Karasyov however has upgraded his rating on Netflix's stock from "negative" to "neutral." While originally joining his colleagues in assuming that ongoing net subscriber add declines and a lack of profitability in the international expansions would drag on the stock for quarters to come, "We believe both of these factors have materialised and are largely priced in at this point," Karasyov wrote in an investor note.
He said that even with net adds declining, he still expects quarter-over-quarter growth to return in the first quarter of 2012. "We believe that repairing the brand and turning around subscriber acquisition trends, not threats of new competition, are Netflix’s main challenges in the intermediate term," Karasyov said.
Hedge fund manager Whitney Tilson is feeling positive as well, and told Barrons that Netflix's stock price could double within months. He has gone from seeing the stock as overvalued to becoming a shareholder. “The core of our short thesis was always Netflix’s high valuation," he told Barron's in a separate interview. "In light of the stock’s collapse, we now think it’s cheap and today established a small long position. We hope it gets cheaper so we can add to it."
Netflix has been facing investor scrutiny since the summer, when its stock price crossed over the $300 per share mark for the first time. At the time, Wedbush Securities analyst Michael Pachter raised the alarm on shrinking margins on the horizon, noting that while Netflix was adding subscribers, most of them are the new streaming-only subscriber, who pays $7.99 per month as opposed to the higher DVD-inclusive subscriptions cost (now $11.99)— and from which Netflix built its core business. Even factoring postage savings, ARPU is shrinking over time. And, Pachter estimated content acquisition costs to grow to $1.98 billion by 2012, up from just $180 million in 2010.
Now, Netflix has lost more than three-quarters of its market value, a full $12 billion in shareholder dollars, since that high point in mid-July. And while it might make it a cheap date, the lack of funds puts even more margin pressure on the company. Netflix recently flexed its muscle with backers, raising $400 million to help cover U.S. content costs and other expenses by selling nearly 2.9 million shares at a discount and convertible bonds to Technology Crossover Ventures. Wall Street didn't like that either, with Netflix seeing a 6% decline in the wake of the announcement.