Netflix to Lose Money in 2012

Joel Anderson |

AMZN, NFLX, TROW, convertible notes, common stock, loss, streaming, DVDs, content, Arrested Development, LoveFilm, Streaming internet provider and DVD mailing company Netflix, Inc. (NFLX) revealed more negative news late Monday when they announced that they were raising $400 million through sale of bonds and a stock offering. Due to the cost of expanding its service into the United Kingdom and Ireland and rising costs for content, Netflix said it anticipates losing money for the year in 2012.

$400 Million Raised

Netflix CFO David Wells stated that the funds raised would improve the company's balance sheet and allow it to focus on "returning to global profitability after our launch of the U.K. in 2012." The funds were raised through a $200 million offering of common stock sold to T. Rowe Price Associates (TROW), selling 2.86 million shares at $70 per share, and the sale of $200 million worth of convertible notes, due in 2018, to Technology Crossover Ventures. All told, if and when the bonds convert, shareholders in Netflix will be diluted by 10 percent.

Increased Costs Lower Guidance

As a part of the S3 registration statement, Netflix also revealed that its outlook for 2012 is not strong. The registration statement closed by saying "As a result of the relatively flat consolidated revenues and previously announced increased investment in our International segment, we expect to incur consolidated net losses for the year ending December 31, 2012." Netflix anticipates that the cost of expansion into the U.K. will play a major role in keeping down profits throughout 2012 as they prepare to do battle with the already popular LoveFilm, which was purchased by, Inc. (AMZN) in January.

Competition and Increased Churn

The costs of Netflix's planned expansion have been exacerbated by the company's very public plunge following its announced increase in prices and failure to create a spin-off subsidiary for its DVD services. What's more, Netflix continues to suffer through increasing costs as the streaming marketplace becomes more crowded and content creators increase costs. Netflix is making efforts to secure more exclusive content, even announcing plans to offer new episodes for the seminal comedy Arrested Development, but studios are continuing to increase prices and Netflix may feel the squeeze well into the future as a result.

Stock Down, Analysts Negative

Netflix initially gapped down to a 52-week low of $69.00 per share at market open, but shares rallied to over $72 a share by mid-day for a drop of only 3 percent. All told, the relatively small decline may indicate that battered Netflix shares, which have lost over three quarters of their value since July, already have these concerns for the future priced in. Nonetheless, many analysts did not appear to hold out much hope. Jeff Rath of Canaccord Genuity (CF.TSX) re-initiated his coverage of Netflix at a sell rating and $60 target saying the company “faces numerous challenges, including accelerating subscriber losses, rising content costs, an increased competitive landscape and the possibility of having to raise capital.” Janney Capital Markets analyst Tony Wible, meanwhile, expressed similar concerns while also stating that, "It is clearer that the DVD business accounts for the vast majority of profits and is overvalued.”

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
CF CF Industries Holdings Inc. 34.20 1.95 6.05 7,959,967
3696:CA Ceres Inc (Japan) n/a n/a n/a 0
TROW T. Rowe Price Group Inc. 73.70 0.95 1.31 1,782,593
AMZN Inc. 808.33 -0.71 -0.09 3,372,090
NFLX Netflix Inc. 138.60 0.19 0.14 9,468,254


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