Netflix Inc. (NASDAQ: NFLX) saw its upgrade and rally cycle halted by an analyst downgrade from BofA/Merrill lynch this morning after the firm cut its Buy rating all the way down to Underperform. BofA said, “take the money and run!” Now comes a report on the credit side of the equation rather than the equity side of the equation. Moody’s has placed Netflix on review for a corporate credit rating downgrade.

Moody’s said that the “Ba2” Corporate Family Rating, the “Ba1” Probability of Default Rating, and the “Ba2” senior unsecured notes ratings have all been placed on review for a potential credit downgrade. This new review was “prompted by the company’s shift towards a potentially more risky business model combined with an increasingly competitive operating environment over the last twelve months.”  

Moody’s said it will evaluate unique risks faced by and growth prospects of each of the Netflix business segments (domestic streaming, international streaming and physical DVD rental). Other issues were “shifting from a high margin, partially variable cost DVD rental business to a low margin, primarily fixed cost online streaming business.” It will evaluate how domestic streaming subscribers can offset losses of higher margin DVD customers and also how Netflix can meet fixed streaming content obligations in the event of rapid subscriber declines in the face of competition.

Reed Hastings’ decision to switch the business model was said by Moody’s to have “impacted the company’s growth trajectory which may allow competitors time to catch up and puts more emphasis on the company’s increasing fixed content cost structure.”

FULL MOODY’s SYNOPSIS

Netflix shares closed at $73.52 on Monday after having been down around $54 just last week. Shares are now down about 7.3% at $68.10 and we have already seen about 150% of a normal day’s trading volume.

JON C. OGG

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