Analyst Downgrades Netflix Due to Competition, Content Cost 'Inflation'

7:43 AM PDT 4/3/2012 by Georg Szalai

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Competitors like Amazon.com "present a greater risk to Netflix's future sub growth at a time when digital content costs are increasing dramatically," says Barclays Capital's Anthony DiClemente.

NEW YORK -- Could Netflix's stock end up treading water after recent gains? Barclays Capital analyst Anthony DiClemente seems to think so. He downgraded his stock rating on the company, led by CEO Reed Hastings, on Tuesday to from "overweight" to "equal weight" with a price target of $115, citing new and emerging competitors and rising content costs.

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"Recently new competitive threats have emerged in the subscription video-on-demand market, which we believe present a greater risk to Netflix's future sub growth at a time when digital content costs are increasing dramatically," the analyst wrote in a report. "Amazon Prime's SVOD offering could eventually be carved out as a stand-alone product that would compete more directly with Netflix for subscribers. Likewise, Comcast's recently announced Streampix service could eventually be offered out of footprint as another direct competitor to Netflix."

He also suggested that the proliferation of TV Everywhere services making pay TV content available online "threatens to cannibalize users' time spent viewing library content."

In terms of content costs, DiClemente spoke of "inflation," highlighting that the amortization costs for streaming content have gone from 12 percent of Netflix's total revenue in 2010 to an estimated 50 percent.

"While rising digital content costs are not surprising given Netflix's shift to a streaming-only company," he said, "we believe Netflix's mounting off-balance-sheet obligations add a greater level of risk to future earnings and liquidity in 2013 and beyond, which will have to be supported through continued subscriber growth."

DiClemente also cited competitive risks in international markets where Netflix has launched, including in the U.K. and Latin America.

As of midday Eastern time, Netflix's stock was down slightly.

E-mail: Georg.Szalai@thr.com

Twitter: @georgszalai