By MICHAEL LIEDTKE, AP Business Writer
SAN FRANCISCO - Netflix Inc.'s stock plunged nearly 24 percent Tuesday, an abrupt reversal in fortune driven by concerns about the rising costs facing the online DVD rental leader as it adapts to new technology for watching movies and TV shows.
The sharp downturn wiped out much of the market gains from a recent rally spurred by investors betting that Netflix's earnings growth would accelerate dramatically amid lessening competition from rival Blockbuster Inc.
Part of that thesis panned out in the first quarter as the largest three-month influx of new customers in Netflix's 10-year history propelled the company to a 36 percent increase in profit during the period.
But those results, announced late Monday, weren't enough to support a stock that had climbed nearly 50 percent this year on expectations that Netflix would top analysts' first-quarter estimates and brighten its outlook for the rest of the year.
Instead, Netflix merely matched the analysts' average earnings estimate of 21 cents per share and slightly lowered its previous projections for its full-year profit.
The disappointment dragged down Netflix shares by $9.32, or 23.7 percent, to finish Tuesday at $30.
Escalating expenses are squeezing Netflix's profits. The Los Gatos-based company is spending more money to expand a 15-month-old service for streaming movies over high-speed Internet connections and pay for more expensive, high-definition Blu-ray discs.
Netflix hopes to defray part of its costs later this year by imposing a "modest" surcharge on customers who want to rent Blu-ray discs.
Netflix's most popular rental plans currently range from $13.99 to $16.99 per month.
The rate increases are expected to affect less than 10 percent of Netflix subscribers because relatively few households own Blu-ray DVD players.
Netflix ended March with 8.24 million subscribers, a gain of 764,000 customers from the end of 2007. That eclipsed the service's previous record of 687,000 new customers added in the first quarter of 2006.
Management attributed much of the first-quarter surge to rate increases that Blockbuster announced in late December. The higher prices triggered a backlash that drove more DVD renters to Netflix, which cut its prices last summer.
But Netflix anticipates only 60,000 to 260,000 more customers will sign up during the current quarter ending in June — typically a challenging period anyway because more people are interested in basking in the warm weather than in watching movies on their couches.
Propelled by more robust growth toward the end of the year, Netflix anticipates entering 2009 with as many as 9.7 million subscribers, up from its previous forecast of 9.5 million customers.
Netflix also disclosed that it has lined up three more partners to broaden the appeal of its streaming service, which offer subscribers a chance to watch movies and TV shows on their computers instead of waiting for a DVD to be delivered in the mail. The streaming service is currently offered at no additional cost to subscribers.
Three consumer electronics companies will offer devices that make it easier to watch Netflix's digital service on televisions, expanding upon a partnership announced earlier this year with LG Electronics.
Chief Executive Reed Hastings didn't identify Netflix's newest partners but said two of them are well known. The TV boxes for Netflix's streaming service are expected to hit the market during the fourth quarter.
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