Netflix beats estimates, but faces increased competition

With less money to spare for entertainment these days, many people are looking for low-cost ways to smile during hard times. What better way than to kick back in the comfort of your own home with some popcorn, cuddle up and view the latest DVD releases?

That's exactly what happened with online movie rental company Netflix (NFLX). And millions are joining in on the fun. The company has a whopping 10.3 million subscribers and its stock has shot up 50 percent this year already. After the closing bell Thursday, Netflix reported a first-quarter profit of 37 cents a share and revenue of $394.1 million, both beating expectations. Analysts polled by Thomson Reuters expected it to earn 31 cents per share on revenue of $391 million.

"First quarter results showed strong momentum driven by consumer attraction to our unlimited rental proposition," said Netflix co-founder and CEO Reed Hastings. "We added more net subscribers than in any previous quarter in our history and grew year-over-year GAAP EPS by 76 percent."

The company also raised its full-year guidance. But some experts believe that Netflix could face trouble ahead with increased competition from cable companies, and sites like YouTube and Hulu. A Lazard Capital Management analyst recently said streaming competition from those sites could be a threat to Netflix, which have deals with Hollywood studios including Sony, MGM, Lionsgate.

The stock was downgraded last week from "buy" to "hold" by Wedbush Morgan analyst Michael Patcher.

"We expect Netflix to consistently outperform market expectations throughout 2009, but anticipate that out-sized earnings performance will embolden company management to make an even greater investment in the company's streaming initiative," Patcher said.

"Outperform" is certainly not a term being used to describe rival Blockbuster (BBI), which is struggling to stay afloat.

Earlier this month, S&P cut Blockbuster's credit rating to "junk" status despite the fact that the company was able to conditionally rework its revolving- and term-loan agreements. But because there is a risk that these conditions may not be met, the company's auditors raised "substantial doubt" about Blockbuster's ability to continue.

In an attempt to boost revenue, Blockbuster and partner NCR expect to roll out 10,000 rental kiosks across the U.S. by 2010. CEO Jim Keyes said "We remain excited about DVD vending, and through our alliance with NCR, we are poised to participate in the category's growth."

But will Blockbuster's strategy work? Will consumers flock to kiosks rather than ordering online? I think I'll continue to wait for my red and white envelope in the mail.

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