Earnings were solid but the DVD rental site’s lower profit forecast, due to the cost of shifting to downloads and Blu-ray, sends shareholders scurrying

BusinessWeek reports that the once thriving Netflix may be in for a bit of a bumpy road ahead.

It has been a good year for Netflix shareholders, until now that is. After riding a 50% spike in the DVD-by-mail company’s shares, investors fled in droves on a first-quarter report that showed record sales and profits, but warned of slowing growth and higher costs.

Netflix had found a nice increase in subscribers after the recent rising of Blockbuster rates and ended the first quarter with 8.2 million subscribers, a 21% surge from the prior year.  However, with increasing technologies and costs that cut into profit margins, the company is treading ahead with careful footing aware that profits are clearly still under pressure.

While higher prices on Blu-ray rentals might scare some customers away, the effect on overall growth may be minimal. Analyst Jim Friedland of Cowen & Co. (COWN) pointed out in a research note published Apr. 22, “Blu-ray subscribers account for a low single-digit percentage of subscribers.”

In terms of movie downloads—currently offered free for PC viewing to existing subscribers—Netflix has nearly doubled the selection of titles from 5,000 at the end of 2007, to roughly 9,000 now. This rapid expansion means that costs to build-out the online channel are rising, Friedland says. “Netflix indicated that it eventually plans to charge for its online instant viewing service, but we expect it to remain free until the number of digital titles increases and a number of Netflix-to-TV devices become available,” he wrote. Netflix plans to release a set-top box made by South Korea’s LG Electronics later this year, and similar partnerships with other consumer electronics companies are expected.