Netflix Shares Tumble on Growth Concerns

April 24, 2012 Updated: October 1, 2015
A U.S. Postal worker holds a stack of Netflix envelopes
A U.S. Postal worker holds a stack of Netflix envelopes at the U.S. Post Office sort facility in San Francisco in this file photo. Online movie rental company Netflix had its shares drop sharply on Tuesday, as analysts have cast doubt on the company's future growth plans. (Justin Sullivan/Getty Images)

NEW YORK—Shares of DVD rental and video streaming company Netflix Inc. dropped sharply on Tuesday, as analysts have cast doubt on the company’s future growth plans.

The Los Gatos, California-based Netflix (Nasdaq: NFLX) saw its shares drop 14 percent on Tuesday afternoon trading.

The company reported poor quarterly results on Monday night, a loss of 8 cents per common share on revenues of $870 million. The company announced a dismal revenue growth outlook, but forecast revenues of $873 million to $895 million in the second quarter.

The disappointing outlook sent its stock price tumbling, with some analysts expressing doubt on the company’s growth prospects.

But this week’s news is not all bad. More than 1.7 million new streaming subscribers signed up in the United States. Netflix also counted new overseas streaming customers of nearly 3.1 million.

On the other hand, DVD-by-mail customers fell by 1.1 million. The growth of streaming customers is exactly what Netflix had hoped for, as it has targeted high-margin streaming customers as opposed to the DVD-by-mail customers.

The company is sticking to its projections of 7 million new streaming customers by the end of the year, but some analysts doubt that figure as Netflix only gained 1.7 million through the first quarter.

“We believe increased competition and a lack of tailwinds from video game console proliferation and video store closures layer in additional risk to that 7 million target,” Barclays analyst Anthony DiClemente wrote in a research note.

On a conference call with analysts, CEO Reed Hastings spent much time discussing content acquisition, the cost of which has taken a toll on the company’s profits. Last year, it was unable to renew its license to stream Starz movies as the studio demanded much more money than Netflix was prepared to pay.

While Hastings admitted that much of its current streaming content licenses would expire in 2014 or 2015, the company is prepared to “spend quite aggressively” to procure more content and renew its existing contracts.

Hastings also said that Netflix might be ready to expand again. Last quarter, the company said it would hold off on any expansion plans until it rights its ship financially. As the company may turn in a profit in the second quarter, the time has come for additional expansion, especially further into Europe.