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Ahead of the Bell: Netflix

Wednesday, 24 Oct 2012 | 8:15 AM ET

NEW YORK -- Shares of Netflix Inc. tumbled more than 16 percent before Wednesday's opening bell, after the company slashed its prediction for how many U.S. video-streaming subscribers it would add this year.

In releasing its third-quarter results, the Los Gatos, Calif.-based company said late Tuesday that it added 1.2 million net streaming subscribers in the U.S. in the three months through September, which was on the low end of its forecast for gains between 1 million to 1.8 million.

As a result, Netflix cut its estimate for full-year U.S. streaming subscriber additions to between 4.7 million and 5.4 million. The company previously predicted it would gain as many as 7 million domestic streaming subscribers by year's end.

Netflix needs to boost its ranks of streaming subscribers in the U.S., because the number of DVD-by-mail subscribers continues to fall and its losses internationally are mounting.

It also needs more subscribers because it is sticking to its price of $8-a-month for unlimited video streaming. The company faced a huge backlash last year when it raised prices as much as 60 percent for people who subscribed for both DVD service and streaming.

Despite the subscriber miss, the company said it earned $7.7 million, or 13 cents per share, in the latest quarter, beating the 5 cents per share expected by analysts polled by FactSet. Revenue rose 10 percent to $905.1 million, in line with forecasts.

Jefferies analyst Brian Fitzgerald said the disappointing subscriber guidance reflects the continued pressure on Netflix's profitability and increasing competition. He backed his "Hold" rating for the company, but cut his price target by $5 to $60.

"We believe the softness in U.S. streaming subs growth will remain an overhang in the near term as pressure from major competitors persists," Fitzgerald wrote in a note to investors.

The analyst said that while the company's viewing metrics continue to improve, he's concerned that competitors like Amazon, along with their efforts to provide more well-rounded offerings, are becoming a bigger threat.

Janney analyst Tony Wible backed his "Neutral" rating for the stock, but cut his fair value estimate by $5 to $48. He said that competition, a slowdown in subscriber growth and global expansion will offset the company's profitability for years.

Citi analyst Mark Mahaney backed his "Buy" rating for the company, saying that even with the weak subscriber guidance the stock represents an opportunity for investors. But cut his price target by $20 to $100 to account for the lower number of steaming subscribers.

Netflix shares lost $11.33, or 16.6 percent, to $56.89 in premarket trading. That would approach its 52-week low of $52.81 set in early August. It traded as high as $133.43 in in early February.

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