The Netflix rally on Wall Street early this month may have been premature, or just plain misguided, based on the latest round of reports about the company ahead of its Q3 earnings call this Tuesday. The general theme this morning is that investors should beware: the video provider could easily fall short of its goals for domestic streaming subscriptions in 2012 — and the Street’s expectations for next year’s earnings. Wedbush Securities’ Michael Pachter, one of Netflix’ toughest critics, says this morning that the stock is “a ticking time bomb.” The company is “highly likely” to fall short of its forecast that it will end 2012 adding 7M domestic streaming subscribers — he says 5M to 6M is “more achievable.” What’s more, net additions next year will “slow to a crawl should Netflix continue to allow content quality to deteriorate” as he says it did when the service lost its deal to offer programming from Starz. If that happens, “we question whether Netflix can generate a profit at all in 2013, if ever.” B. Riley & Co’s Eric Wold also sounds the alarm about domestic subscriber growth, saying that the 7M target is “at risk.” The year end tally is more likely to be +5.6M, he says, with an addition of just 1.1M in Q3 for a total of 23.8M. He’s also concerned that the company’s “expanding too quickly internationally.” Many investors believe that Netflix is gearing up to hit France early next year, which would be its fourth big market in 18 months after Latin America, UK/Ireland, and Scandinavia.
Bernstein Research’s Carlos Kirjner is less fearful — he calls the bear and bull cases for Netflix ”roughly equiprobable.” Still, he lowered his earnings per share estimate for 2013 to $1.64 from $3.16 noting that it’s “unclear whether (or for how long and how much) Netflix will be able to continue to expand the margins of its domestic streaming business or even whether it will be capable of maintaining its margins once revenue growth slows.” Lazard Capital Markets’ Barton Crockett cited international spending as he, too, trimmed his 2013 EPS estimate — to 42 cents from 67 cents. He also lowered his Q3 estimate for new domestic streaming subscriptions by about 100,000 to 1.37M. “We see the stock as too volatile to go long or short, but with the potential to be interesting if spending levels out domestically while streaming subs continue to grow,” he says.
The price of Netflix shares is down 43% over the last 12 months, but surged 21% since the beginning of October. The stock took off after hedge fund investor Whitney Tilson, Citi analyst Mark Mahaney and Morgan Stanley’s Scott Devitt said Netflix had become a bargain, with Amazon seeming to fade as a competitive threat.