Netflix Inc. (NFLX:US), the world’s largest online video service, fell the most in almost three months after reducing its forecast for domestic growth and predicting larger losses from international expansion.
The shares tumbled 12 percent to $60.12 at the close in New York following the company’s third-quarter report yesterday that showed domestic streaming growth missed analysts’ projections. The decline was the second biggest among Standard & Poor’s 500 Index stocks.
Netflix is counting on its profitable U.S. streaming and mail-order DVD businesses to pay for overseas growth, a plan analysts question with dwindling gains at home. Chief Executive Officer Reed Hastings forecasts 1.3 million to 2 million new U.S. streaming customers this quarter, reaching 27.1 million at most by year end, according to a website statement.
“It’s very smart for us to invest as we are,” Hastings said yesterday in an interview. “Internet video is the way of the future. It’s what gives us the confidence to make these big and aggressive bets.”
The Los Gatos, California-based company has no plans to change its strategy or raise prices, Hastings said. Establishing early brand leadership globally will create a “multi-decade” profit stream, he said.
With $5 billion in obligations to buy movies and TV shows for online customers, including $2.1 billion due over the next 12 months, the company’s current plan can’t be sustained, said Michael Pachter, an analyst at Wedbush Securities Inc. in Los Angeles who rates the stock underperform.
“Streaming growth is slowing to a crawl, while their DVD business is generating 90 percent of all profit -- and that’s declining super fast,” Pachter said in an interview.
Netflix signed 1.16 million new U.S. streaming subscribers in the third quarter, according to the statement. Analysts had predicted 1.43 million, the average of 10 estimates in a Bloomberg survey. For the full year, the company expects to add as many as 5.43 million, fewer than the 7 million Hastings had predicted earlier.
“We’re feeling our way along as the streaming market grows,” Hastings said on a conference call. “I would call it more of a forecasting error than anything else.”
Caught between slowing domestic growth and the overseas push, Netflix will be “stuck in an investor no-man’s land” until it can show progress, said Michael Olson, an analyst with Piper, Jaffray & Co. in Minneapolis who rates the stock neutral.
The company finished the quarter with $798 million in cash and short-term investments and expects several quarters of negative free cash flow as a result spending on original programming and other content, according to the statement.
Netflix is investing in original series to fend off growing competition for content and customers from Amazon.com Inc. (AMZN:US), Hulu LLC and TV Everywhere options such as Time Warner Inc.’s HBO Go.
“We have enough cash on hand to fund our planned originals in addition to our ongoing expenses, maintain an adequate reserve, and then return to positive free cash flow,” Hastings said in the statement.
Third-quarter net income fell 88 percent to $7.68 million, or 13 cents a share, from $62.5 million, or $1.16, a year earlier, as Netflix bore costs to pursue its expansion outside the U.S. Analysts had forecast profit of 5 cents, the average of 29 estimates compiled by Bloomberg.
Sales rose 10 percent to $905.1 million from $821.8 million a year earlier, beating the $904.9 million average of 29 analysts’ estimates. In July, Hastings had suggested competition for viewers with the summer Olympics might temper new signups.
This quarter, Netflix forecasts sales of $919 million to $943 million, shy of analysts’ projections (NFLX:US) of $943.5 million. The company said results may range from a loss of $13 million, or 23 cents a share, to a profit of $2 million, or 4 cents.
Analysts forecast a loss of 8 cents, the average of 29 estimates.
Worldwide, the company has 29 million streaming customers and 8.61 million on its mail-order DVD plans.
Netflix’s declining DVD business is becoming another barometer of the company’s health. It’s the most profitable business, with $131 million in income last quarter, and helps finance the overseas growth. The number of users may drop by 760,000 this quarter, after shrinking 2.56 million so far this year, Netflix said.
The company predicts the mail-order business will generate $117 million to $129 million in profit this quarter. The domestic streaming business is forecast to earn $94 million to $102 million. Losses from international streaming will widen to $107 million to $119 million from $92 million in the third quarter. Hastings began offering service in Scandinavia last week.
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