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Will the Curtain Rise For Netflix?

NEW YORK ( TheStreet) - Netflix (NFLX - Get Report) reports earnings after the bell, and investors are wondering whether the company can continue its fourth-quarter momentum, or if the tides have turned again on the company.

Netflix had one of the most tumultuous years a public company could have in 2011. The company's stock soared towards $300 per share as strong momentum continued to generate interest, only to plunge following several high-profile blunders.

The video company instituted a massive price hike for subscribers, prompting a headline-grabbing backlash. Then, Netflix tried to separate its DVD and streaming businesses, further alienating customers. Content deals also turned sour, forcing Netfilx to lose exclusivity on some deals that made it popular in the first place.

These errors led to TheStreet readers naming CEO Reed Hastings as the worst tech CEO of 2011.

Despite all this, 2011 ended strong, with the Los Gatos, Calif-based company beating fourth-quarter expectations and regaining some of its lost subscribers. There are doubts, however, that this momentum can continue.

Wedbush Securities analyst Michael Pachter isn't sure Netflix can continue sustained growth, citing worries over the firm's international rollout and the loss of the Liberty Starz (LTSZA) content. Pachter, however, does note in a research report that the company is likely to add subscribers this quarter and investors may react favorably. On the other hand, he adds, management will continue to focus on adding subscribers by doing anything they can, which may hurt profitability.

"We expect management to chase subscriber growth at all costs, driving marketing spending ever higher, making them unlikely to provide a specific earnings range for the full year," Pachter wrote in his research note. The analyst rates Netflix shares "underperform" with a $45 price target.

During the fourth quarter, Netflix added 610,000 total U.S. subscribers, of which 220,000 were streaming only. It also added 380,000 international subscribers.

If management were to continue chasing subscribers by any means necessary, this could hurt long-term profitability, and cause a wide range of earnings estimates, says J.P. Morgan's Doug Anmuth. Still, he believes investors will continue to focus on subscriber additions, at least for now. He expects streaming margins to be higher than the 11% guidance Netflix gave last quarter, coming in at 12.4%. Anmuth rates Netflix shares "neutral" with a $95 price target.
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