Netflix: Video Streaming Could Reduce Profits

Jun. 5.09 | About: Netflix, Inc. (NFLX)

Credit Suisse analyst John Blackledge Friday morning launched coverage of Netflix (NASDAQ:NFLX) with an Underperform rating and a $31 price target, well below yesterday’s close at $40.50.

logoHis thesis is that the company’s video streaming initiative could prove to be a drag on margins. He sees adjusted EBITDA margins falling 150-200 basis points from the 2008 level over the next two years. “NFLX’s digital streaming content is free for subscribers, resulting in a new layer of fixed costs, without boosting revenue,” he writes. “In many cases, NFLX is paying content owners twice for the same content.”:

Meanwhile, Blackledge also asserts that the growing video kiosk segment could increase churn over lower-priced high margin NFLX subscribers, which also could pressure margins.

The Credit Suisse analyst thinks ARPU declines are likely to continue over the next five years at a rate of about 1.6% a year.

Thomas Weisel analyst Christa Quarles Friday morning also weighed in on the threat of the kiosk sector, noting that the business will top $800 million in revenue this year, from a standing start just a few years ago. She thinks most of the revenue is being siphoned off of the in-store rental and DVD sell-through markets, but concedes that “the price point and size of footprint suggest the impact could be wider.” She contends that at $1 a disk per night and averaging a little more than $2 per rental, with as many as 22,000 locations by year end, “Redbox will have a more attractive consumer offering than Blockbuster ever did.”

Quarles does not think Redbox, which is a unit of Coinstar (CSTR), is a long-term threat to Netflix, but cautions that “it could dent some of the near-term growth if the service continues to gain in popularity at rates seen thus far.

NFLX Friday is down $1.50, or 3.7%, to $39.21.

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