Stock Market Predictions

Netflix shares fall after stumble with Starz

Stock Market Predictions

The collapse of talks, announced Thursday, with cable channel operator Starz Entertainment underscored investor concerns that Netflix may lose its edge in online rentals.

Under the leadership of well-regarded Chief Executive Reed Hastings, Netflix shares have tripled since January 2010. But the rocketing price and recent stumbles, including a July decision to raise some prices, have drawn short sellers betting the momentum cannot continue.

Hastings decided to raise prices for subscribers who still want DVDs-by-mail, a move seen as emphasizing higher-margin streaming plans. The price hike angered so many customers that the company warned it would see a pause in its normally explosive subscriber growth.

Wedbush analyst Michael Pachter, who has rated Netflix "underperform" for more than a year, said the failure to make a deal with Starz was evidence of higher content costs the company must grapple with as providers recognize their leverage.

"Starz is the perfect example. Content owners have to play hardball with Netflix," said Pachter, who has a $110 price target on Netflix shares.

Starz, controlled by John Malone's Liberty Media, ended talks with Netflix to renew a streaming deal. After February, Starz will stop providing its content, which includes exclusive rights to first-run Sony Corp and Walt Disney Co movies, for streaming on Netflix.

Netflix said Starz movies and shows account for just 8 percent of U.S. subscribers' viewing, but some analysts said lack of new content may lead to higher customer attrition.

Netflix has long enjoyed a near-monopoly in the online streaming space but the recent entry of Amazon.com Inc and Google Inc's YouTube could potentially lead to subscribers switching to alternative services.

The field could get even more crowded. Dish Networks, which won Blockbuster Inc in a bankruptcy auction for $320 million, is expected to expand its business beyond satellite TV and eventually into online video streaming.

"Rising content costs and increasing competition from incumbent and new players alike remain our top concerns," UBS analyst Brian Fitzgerald said of Netflix.

SHORT SELLERS' PICK

Yoni Jacobs. portfolio manager for Chart Prophet Capital, said he previously shorted Netflix in the face of growing competition in the online market and a "weak" streaming library. Jacobs covered his short position when Netflix shares hit $200 but remains negative on the company's outlook.

"Their library is even weaker now" after the breakdown with Starz, Jacobs said.

Gareth Feighery, a founder of Philadelphia-based options education firm MarketTamer.com, said the inability to renew the Starz contract could just be the trigger for short sellers. "The failure to strike a deal with Starz might be just the fundamental event the short sellers have been waiting to pounce upon."

Netflix is one of the heaviest shorted blue-chip technology stocks. Its shares have a short interest of 15.5 percent as of August, implying that more than 1 in 6 Netflix shares is shorted. Blue-chip technology stocks like Google and Apple have short interest positions below 2 percent.

Content owners and short-sellers have questioned how Netflix can charge customers so little.

ALTERNATE DEALS

Netflix was offering to pay somewhere in the $200 million to $300 million range annually for rights to stream Starz content, a source familiar with the negotiations said.

Some analysts remain positive on Netflix's prospects to secure alternative deals.

Stifel Nicolaus analyst George Askew, who has a "hold" rating on the company's stock, said the loss of the Starz contract could help Netflix in the long term, as it could use the money for replacement content.

Netflix shares closed Friday on Nasdaq down $20.16 at $213.11.

(Reporting by Himank Sharma and Lisa Richwine; Editing by Gopakumar Warrier, Maju Samuel and Tim Dobbyn)