Netflix Shares Slump on International Bet

NEW YORK (TheStreet) -- Netflix (NFLX) shares plummeted on Wednesday after the company forecast a loss later this year following its second-quarter earnings report.

On Tuesday, when Netflix reported its second-quarter results, management also announced plans to launch in new international markets by reinvesting U.S. profits. The company expects a profitable third quarter, but warned that its strategy will drag the bottom line temporarily into the red by the fourth quarter.

"Our model, as we've explained, is to get back to profitability and then open a new market, get back to profitability, open a new market," explained Netflix CEO Reed Hastings, during a conference call to discuss the results. "There's an extraordinary once-in-a-lifetime or once-in-a-generation opportunity to build a franchise in many markets as we've been building."

Hastings pointed, in particular, to expansions already underway in the U.K., Ireland and Latin America. "Over time, [these will] prove to be very valuable and we'll all be very happy that we've done it."

Investors were unimpressed by the plan, pushing Netflix shares down 25.02% to $60.28 on Wednesday.

The plans for international expansion also concern William Blair analyst, Ralph Schackart, who maintained his 'market perform' rating of the video streaming provider, but adjusted his guidance downward.

"Said another way, management is making a huge bet on international markets to drive future growth--a business decision that drastically increases both the risk and potential rewards for shareholders," he noted. "To state the obvious, three years from now management will likely be considered brilliant or overly optimistic."

Considering the increasing number of video streaming offerings, some analysts are doubtful that the domestic market will continue to provide a profitable backstop for Netflix's new market launches.

JP Morgan analyst Doug Anmuth, who maintained his 'neutral' rating and reduced his price target from $87 to $63, said, "We think Netflix remains a 'show me' story into the back half of 2012 as the company drives a majority of its 2012 domestic streaming net adds in 3Q and 4Q due to positive seasonality, though competition from Amazon (AMZN), Hulu, and TV Everywhere continues to increase."

Hastings acknowledged Amazon and Hulu as Netflix rivals during the Netflix earnings conference call on Tuesdays, but suspects the long-term competition for viewing hours will come from multichannel video programming distributors and cable networks, both directly and through TV Everywhere offerings.

Netflix reported second-quarter earnings of $6 million, or 11 cents a share, on revenue of $889.2 million for the three months ended in June, beating the average estimate of analysts polled by Thomson Reuters for earnings of 5 cents a share on revenue of $888.9 million.

--Written by Nathalie Pierrepont in New York.

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