Netflix shares, which traded sharply yesterday after the company reported much higher than expected streaming hours in the fourth quarter, is giving back some ground Thursday morning following a grim note on the company�s prospects from Needham analyst Charlie Wolf. The analyst repeated his Underperform rating on the shares and slashed his EPS estimates for both 2011 and 2012, though for the most part his estimate reductions were playing catch up with previous corporate guidance.
�In its effort to drive subscriber growth, Netflix has spent what some would regard as recklessly to acquire streaming content,� he writes in a research note. �However, subscribers growth has not kept pace with the growth in content costs. As a result, the profitability of an average stream subscriber has fallen dramatically. Unless Netflix brings the growth in content costs into line with the growth in streaming subscribers, our analysis indicates the company�s domestic streaming business could soon become unprofitable.�
Wolf notes that the situation could reverse if subscriber growth were to re-accelerate. But he adds that this seems unlikely in the U.S.
�A more likely scenario is that Netflix brings the growth in content costs into alignment with streaming subscriber growth,� he writes. �An acceleration in subscriber growth or a deceleration in the growth in content acquisition costs could trigger an upgrade.�
Wolf cut his 2011 EPS forecast to $3.94, from $4.25; Street consensus is $4.10. For 2012, he now sees a loss of 50 cents a share, down from a profit of $2.50; consensus is for a profit of 14 cents.
Note that Netflix in November had said in an SEC filing that it expects to post a loss in 2012, so Wolf is a little late with his move here.
NFLX is down $1.20, or 1.5%, to $79.25; yesterday the stock jumped $8.21, or 11.4%, to $80.45.
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