NEW YORK (CNN/Money) -
Netflix Inc. shares tumbled nearly 37 percent in after-hours trading Thursday even after posting strong third-quarter earnings.
Netflix said earnings jumped more than four-fold, but shares came under pressure after the company said in a statement that it expects the business environment to become more competitive in the coming year.
Netflix established the market for no-late-fees, mail-to-home DVD rentals but faces emerging competition from big companies like Blockbuster (Research) and Wal-Mart (Research). And now the company's CEO, Reed Hastings, says that Amazon.com (Research), the world's largest online retailer, could be the latest rival in the new but saturated market.
"We believe that Amazon is going to enter this market in the near future," Hastings told CNN/Money. "It could happen before the holidays."
In addition, Hastings said the company is expected to operate at break-even rate in 2005; the Street had been expecting a profit.
The Los Gatos, Calif.-based company also said it will cut the monthly subscription charge in the face of rising competition. Its unlimited monthly DVD rentals will be decreased by 18 percent to $17.99 from $21.99, beginning in November.
Shares of Netflix dropped to $11.05 after ending the regular session at $17.43.
"I think the stock will trade down significantly because of lower profits for the next year, but the long term value (will rise) -- in two years -- because of our actions today, being decisive and taking the steps to ensure our continued leadership in this larger market with larger competitors," Hastings told Reuters.
Wedbush Morgan Securities analyst Michael Pachter, who has a sell recommendation on Netflix, called the price cuts "odd" and told Reuters that Hastings should pay more attention to the threat from Blockbuster. "I think these guys lose in a price war with Blockbuster," he said.
Following Thursday's close, Netflix reported net income of $18.9 million, or 29 cents per share, in the quarter, compared with $3.3 million, or 5 cents per share, in the year-ago period. But excluding special items, the company reported an earning of $22.6 million, or 35 cents per share.
Wall Street analysts on average had predicted the company to earn 32 cents per share.
The company attributed the gain in part to lower-than-expected shipping costs after subscribers in the quarter rented fewer movies than expected.
Netflix (Research) last week said third-quarter net profit would surpass its previous forecasts of $6.7 million to $10.2 million.
The company's cost to acquire new trial subscribers rose in the third quarter to $36.97 each, compared with $31.81 for the third quarter of 2003.
Subscriber "churn," a closely watched measure of turnover in the company's subscriber base, rose to 5.6 percent for the third quarter compared with 5.2 percent a year earlier.
-- Reuters contributed to the story