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Netflix shares continue to plummet

October 25, 2011

By Ben Fritz

One analyst called it the "nuclear winter scenario" for Netflix.

Shares in the company plummeted 35% Tuesday, the day after the streaming video and DVD rental service revealed it had lost 800,000 subscribers in the third quarter and projected far slower growth for the rest of the year and early 2012 than investors had expected.

The consumer exodus came after a series of public gaffes over the last few months including a surprise pricing change that raised some subscribers’ fees by 60%; the impending loss of recently released movies from Sony Pictures and Walt Disney Pictures; and a hasty retreat from plans to separate its DVDs-by-mail business into a new brand called Qwikster.

With its stock closing at $77.37 Tuesday, Netflix has experienced an extraordinary 74% drop in value from its high of nearly $300 in July. In the process, the Los Gatos, Calif., company has lost $11.6 billion in market value and turned one of the entertainment and technology industries’ biggest growth stories into a cautionary tale about how quickly things can go downhill.

While many investors moved quickly to sell Netflix shares after it reported financial results Monday, the stock was hammered further by a wave of negative analyst reports.

Goldman Sachs downgraded its shares to sell from neutral while noting, "we do not see a clear catalyst path that would drive shares going forward." Analysts Ingrid Chung and Maria Seredina said that Netflix appears to have "no proactive plan" to win back customers and said they were "disappointed" at the company's decision to expand into the already competitive British market in early 2012.

Goldman projected that the stock would fall only slightly more to $75, while Susquehanna Financial Group’s Vasily Karasyov – who characterized Netflix’s distressed state as the "nuclear winter" – set a price target of $60. Janney Capital Markets' Tony Wible predicted the stock could go as low as $51.

But not all media analysts were pessimistic about Netflix’s future.

Credit Suisse’s John Blackledge said he believes the stock will rebound to $100, arguing that Netflix is merely in a "period of transition" and not facing fundamental problems.

"We do not believe the opportunity has changed for Netflix," he wrote. "We believe the competitive positioning is strong and will look for further inflection points in subscriber growth and international profit progress over the next 12 months."

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