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At Netflix, a plot twist for the worst

For most of its history, Netflix (NFLX) could do little wrong in the eyes of Wall Street. Now, the streaming video company can't catch a break as worries about slowing growth and heightened competition from Amazon (AMZN) weigh down its once high-flying stock.

Shares of Los Gatos, California-based Netflix, which have surged nearly 200 percent over the past five years, plunged 13 percent, to $94.24, on Tuesday. That followed its latest quarterly earnings announcement on Monday after the market closed. It's not that the results were terrible. Rather, it was the company's forecast for lower-than-expected future subscriber growth that had investors hitting the sell button.

Some Wall Street analysts, such as Michael Pachter of Wedbush Securities, see Netflix facing some daunting challenges ahead, particularly in light of Amazon's decision to offer its own video-streaming service as a stand-alone option at a price of $8.99 per month, $1 less than Netflix.

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"While we don't think that Amazon will attract many current Netflix customers ... it is foolish to assume that potential SVOD (Streaming Video On Demand) customers will favor Netflix over Amazon every time," wrote Pachter in a note to clients. "We acknowledge that Netflix has the much more powerful brand for SVOD, but we are confident that once it announced a standalone service, Amazon declared war on Netflix, and intends to back up its new offering with a branding strategy of its own." He rates Netflix as "underperform."

Netflix's content costs, long a concern for investors as the company battles rivals such as Hulu and so-called skinny bundles -- customized packages of fewer cable channels at lower cost -- is expected to hit $6 billion this year, an increase from $5 billion a year earlier. These trends will help create a double whammy for Netflix, according to Pachter.

Speaking to Wall Street analysts during yesterday's post-earnings-report conference call, CEO Reed Hastings said Netflix was moving toward getting half of its revenue from the U.S. and half from overseas. The company is now offering the French series "Marseilles" and a program called "Narcos," which has Spanish-language dialogue.

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Of course, Netflix continues to mint money. Net income in the latest quarter jumped to $27 million, or 6 cents per share, compared with $23 million, or 5 cents per share, a year earlier. Revenue rose to $1.83 billion, as viewers flocked to the company's hit shows such as "Making a Murderer" and the latest season of fan favorite "House of Cards."

Netflix added 2.23 million U.S. customers, beating its internal forecast of 1.75 million. It ended the quarter with 81 million customers worldwide, up from 59.6 million a year earlier.

However, while Netflix added service to 130 countries in the first quarter, its appeal may be limited because most of the service's content is in English, and the international business posted a loss of $104 million.

But Wall Street was most spooked by Netflix's forecast that it would add only 2 million international customers in the current quarter, below the 2.37 billion analysts had forecast. Netflix benefited from its launch in Australia and New Zealand a year earlier.

Rising content costs will likely hurt profit in Netflix's U.S. business, where growth is forecast to slow to 500,000 customers in the second quarter vs. 900,000 a year earlier.

"Investor focus is more likely to shift to what [third quarter] and the [second half of the year] international growth will look like. Some may overshoot to the downside in their models as seasonal strength in the second half of the year may be overlooked," said Anthony DiClemente, an analyst at Nomura Securities, who rates Netflix as a "buy."

Netflix still expects to expand its subscriber base to 100 million by 2017. The question in the minds of many investors is: What price will the company pay to get there?

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