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Shares of Netflix tumble on subscriber growth fears

Netflix envelopes sit in a bin with other mail at the U.S. Post Office sort facility.
Netflix envelopes sit in a bin with other mail at the U.S. Post Office sort facility.Justin Sullivan / Getty Images

Shares of Netflix (NFLX) were down over 12 percent in morning trading Tuesday after the video rental company disappointed investors late Monday by projecting slower subscriber growth this quarter for its key U.S. video-streaming service.

While Netflix reported a first-quarter loss that was not as steep as Wall Street had projected, it warned that domestic second-quarter streaming additions would fall below the level during the same period two years ago.

“The question is whether this is a cyclical or secular slowdown,” said Janney Montgomery Scott analyst Tony Wible.

Netflix is doing the best they can do in a difficult situation, he told CNBC, and competition is increasing all the time.

Despite predicting total U.S. streaming-subscriber additions in 2012 would reach about 7 million, "about the same as in 2010," the nearer-term guidance rattled investors, said Wedbush Securities analyst Michael Pachter.

Adding customers to the instant-streaming business is crucial to the company's future as it moves away from mailing DVDs in its signature red envelopes. And sustaining strong growth in users will help offset rising costs as Netflix writes bigger checks for new movies and TV shows.

"They are giving a signal to the Street their growth story is over," said Pachter, who rates Netflix a "sell."

Netflix said seasonal variations would affect second-quarter customer growth. In a letter to shareholders, CEO Reed Hastings and CFO David Wells said they saw "nothing new or particularly concerning" about customer viewing, acquisition and retention. "All are healthy," they said.

"Our gross additions are strong. Our retention is strong. We are feeling good about the year," Hastings said in an interview with Reuters.

Netflix never fully recovered credibility with investors after a tumultuous 2011, when a price-hike and plan to hive off its DVD business -- quickly abandoned -- sparked cancellations by angry customers.

It lost more than 800,000 U.S. subscribers in the third quarter, though it rebounded by gaining back 610,000 in the last three months of the year.

Once one of Wall Street's highest-flying stocks, shares of Netflix shares saw a 80-percent slide in the second half of last year, but they recovered smartly this year and have risen 47 percent since the end of December.

Reuters contributed to this report.