Analysts downgrade former high flier on weak outlook

An avalanche of analyst derision helped drive a precipitous decline in Netflix stock on Tuesday, and the company’s quest for content came in for criticism.

Shares plunged 35% to $76 after being battered in pre-market trade following disappointing financial earnings and outlook on Monday afternoon. The drop in stock price was Netflix’s largest in seven years. The stock closed at $77.37 on Tuesday.

A handful of analysts cut their recommendations on the company. Janney Capital slapped a “sell” on the stock and slashed its price target to $51 from $102, saying Netflix’s business model isn’t sustainable given higher costs and a weakening subscriber base.

While analysts had significant issues with the state of Netflix’s business, the company’s approach to programming took some shots as well. In a Q&A Monday, CEO Reed Hastings focused on increasing content acquisition as key to turning the company around.

Many seized on the $3.5 billion pricetag Netflix faces in global streaming costs over the next few years as too much given that the defection of 810,000 subs amounted to a rejection of passing the price increase onto them.

“The company has paid exorbitant prices for content while painting itself as a cheap rental service,” said Janney analyst Tony Wible. “Simply put, the company’s brand does not fit with its large/growing content obligations.”

ISI Group analyst Vijay Jayant interpreted the consumer revolt as confirmation that Netflix isn’t seen in the marketplace as a replacement for pay TV options like HBO but a complementary offering “that’s nice to have but not essential. The quality of its content library, in the end, might be catching up with it.”

Michael Corty, analyst with Morningstar, cast doubt on whether Netflix can make the kind of programming deals that will make a material difference for its business. “We’ve argued for some time that Netflix only has access to so much ‘quality’ content from the major TV and movies studios as this content has so much value in the pay TV ecosystem,” he said. “Hastings talks about increasing content investment in order to satisfy current and new subscribers, but we think the company lacks negotiating power with content providers. For example, we can’t imagine the licensing deal with stale CW network content adds much value.”

The CW deal, which gives Netflix non-exclusive access to a broad array of content estimated to be worth $1 billion, capped a flurry of content pacts made with programmers in recent months including DreamWorks Animation, AMC and Discovery.

Emphasizing the competitive pressure, Amazon execs stressed Tuesday that they’re continuing to invest in content both abroad, where Amazon’s LoveFilm service goes head to head with Netflix, and at home. “We will certainly be purchasing content for our U.S. business, both paid and free business,” chief financial officer Thomas Szkutak told investors on a conference call to discuss quarterly earnings. Amazon declined to break out the dollar figure for investment in content but Szkutak said it was one reason for the higher overall spending that’s eating into profits.

Next month the company is introducing its Kindle Fire, which Szkutak said will give users the easiest access yet to Amazon’s “vast amount of paid and free” digital content.

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