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Wedbush dubs Netflix “broken”

Outspoken Wedbush Securities analyst Michael Pachter has downgraded Netflix to “underperform,” calling the film rental service “broken” and saying there may be no bottom to the company’s 2012 losses. Netflix-logo

Pachter says the price increases of earlier this year were handled in a haphazard fashion that cost the company dearly – and notes the fallout from it is still continuing months later

“It is clear that a price increase was necessary, and equally clear in hindsight that a 60 percent increase on the hybrid customer was too much,” he wrote. “While we think that the company would have seen some customer defections and trade-downs at any price point, it is clear to us that the defections and trade-downs would have been less dramatic had the price increases been smaller.”

Pachter, who has historically been a bit bearish on Netflix, added he was also particularly concerned with rising content costs and felt the focus on international expansion would be a significant cash drain on the company for an extended period. 

“We think that the company’s pricing structure is wrong, and its business model is broken,” he said. “At current prices, we expect Netflix to continue to lose more hybrid customers than it adds, and those who remain will not be particularly profitable. … Unless the company changes its strategy, we do not see upside to our $45 price target, and we see meaningful downside. In order to prompt a strategy change, company management must first admit that the current strategy is unsound, and we have seen no indication of that over the last several months.”