Netflix, Inc. (NASDAQ: NFLX) had some impressive growth numbers on the surface.  The problem is that Wall Street and investors look ahead, and the devil is always in the details.  We have seen some positives so far, but we are also seeing some new and stronger caution prevail in the analyst community as well.

The numbers were impressive on the surface: Revenue rose about 45% to $718.5 million, operating income rose 75% to $102.2 million, and earnings rose about 88% to $1.11 EPS; Churn was up marginally to 3.88% per month, average revenue per user was up over 4% to $12.18 and subscriber acquisition costs fell by about one-third to $14.38 per user. 

Gabelli & Co. is cautious on the stock.  It noted decelerating growth in Canada, a new market lauch in the second half of this year, the launch of a third international market in 2012.  It did note that “fears of chord cutting were likely misplaced.”  Another plus was that House of Cards, its original series license, is “merely an extension of its success with serialized drama. While a new series has more content risk than reruns, the investment risk remains manageable.”  Perhaps the biggest concern from Gabelli was competition from Dish, Amazon.com (NASDAQ: AMZN), and Hulu, along with higher content costs.

Gabelli says “Sell” on Netflix.  The firm calls it “an excellent business, priced for perfection” priced at 30-times 2011 EBITDA and 55-times expected earnings. 

Janney Capital Markets also downgraded its rating to “Sell” and it is reducing its a ‘fair value’ target to $170 from $175 based on lower expectations in 2012.  The firm also cited competition, and it cited higher content costs and cited an expectation of higher subscriber acquisition costs.  It also cited rising risks of competition coming from Apple Inc. (NASDAQ: AAPL) and from Google Inc. (NASDAQ: GOOG).

Janney Capital further noted, “we are troubled by the company’s streaming cost accounting and its limiting of disclosures in this increasingly volatile environment.”

Again, there are generally two sides to any story and Netflix sure has more than one side to this story.  Gross margins of 39% were higher than most estimates, as were the growth in subscriber targets.  Maxim Group has reportedly raised its rating to “Hold” from “Sell” after the earnings report.  Following last night’s release, Canaccord Genuity raised the expected price target to $300 from $250 on the belief that “Netflix is in the sweet spot between declining physical competition and the advent of serious digital competition.”  Canaccord also raised revenue and earnings expectations to $3.3 billion in sales and $5.40 EPS for 2011 and $4.5 billion in sales on $8.29 EPS in 2012.

The caution is so far outweighing the positives.  About six minutes before the open, Netflix shares were down 5.15% from its $251.67 close at $238.68 and its 52-week trading range is $90.00 to $254.98.

After about fifteen minutes of trading we have Netflix shares trading down 4.4% at $240.62 and we have already seen more than 3 million shares trade hands.

JON C. OGG

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