Is Netflix Business Model Unsustainable?

Netflix (NASDAQ:NFLX) has provided a dismal outlook for its operations after mass customer cancellations and a forthcoming expansion into Europe. Expecting a loss for the first quarter of 2012, the company is trying to weather the most difficult period in its 15 year history. It’s been an extremely tough period dealing with customer resistance to its pricing strategies and other abortive moves. Since announcing earnings this week, the stock has been downgraded by hordes of Wall Street analysts.

“We believe the NFLX model is unsustainable, as the company faces rising costs that it hoped it could pass onto its (subscribers), which appear unwilling to do so,” Janney Capital Markets said in a note to clients.

“Expansion into the UK and Ireland – a positive longer-term – comes at the same time domestic growth is slowing and content costs are building,” said J.P. Morgan Securities (NYSE:JPM), which expects a combination of these factors to significantly pressure 2012 profitability. J.P. Morgan (NYSE:JPM) cut its price target for NFLX from $205 to $67 and the rating from “overweight” to “neutral”. Citibank (NYSE:C) also downgraded the stock to “neutral” citing “major execution errors”.

The question remains whether Netflix (NASDAQ:NFLX) success was simply a phase during a longer transition to digital movies and television, or whether the company can continue to remain the go-to place for customers. Clearly, the stock has fallen out of analysts’ favor as the once Wall Street darling has crashed over 60% in three months.