Netflix Stock Gets Love From One Analyst, Downgrade From Another Citing Brexit

Netflix
Netflix's 'House of Cards'

"We expect Netflix to continue to take usage share from traditional linear networks," writes Guggenheim's Michael Morris, while Needham's Laura Martin focuses on the possible impact of the U.K. EU vote.

The stock of streaming video giant Netflix got very different call-outs from two Wall Street observers on Tuesday.

Guggenheim Securities analyst Michael Morris added the stock to his company's list of "best ideas," predicting that investor focus would "return to value proposition and pricing power." Meanwhile, Needham & Co. analyst Laura Martin on Tuesday cut her Netflix stock rating from "buy" to "neutral" and reduced her second-half financial estimates "because we worry that Brexit adds fundamental risks that decelerating GDP growth in the U.K. and the EU over the next 12-24 months will accelerate churn of Netflix subscribers ... or slow subscriber growth."

Morris in an early morning report was bullish. "We are adding Netflix to our best ideas list and maintaining our price target of $150, representing 55 percent upside to the July 1 closing price of $96.67," he wrote. "We believe that consensus investor expectations under-appreciate the long-term domestic opportunity that is presented by an industry-low hourly consumption cost to the consumer. We expect Netflix to continue to take usage share from traditional linear networks and as such see the company having greater potential for future domestic price increases than current consensus expectations imply."

Morris said that investor concerns primarily focus on content costs and streaming market share, which he said were "both reasonable concerns." But he highlighted that people sometimes "fail to see the magnitude of the relative value proposition Netflix provides to the consumer when compared to the cost of traditional television," including its original series, such as House of Cards.

In 2015, Netflix generated less revenue per average hour of content consumed than nearly any other content provider, with the exception of the Fox broadcast network, the analyst mentioned. "We believe a gradual convergence of Netflix revenue per hour consumed to an industry-average level is a realistic long-term parameter assuming that over time, economics and utility align," he said. "While we expect the process to take more than two years, we note that were Netflix to achieve a domestic average broadcast revenue per streamed hour level of 21 cents in 2018 (72 percent above our currently forecasted rate), total domestic revenue would be $11.9 billion, almost $5 billion ahead of our current estimate."

In the context of the company’s $6 billion in content spending in 2016, Morris highlighted the start of a Disney film output agreement, which will begin in the fall. "We expect enthusiasm for the expanded offering, combined with strong subscriber trends through recent effective price increases, will bring investor interest back to the Netflix story," Morris said.

He added: "We believe that the company’s about $41 billion market capitalization remains low relative to the global growth opportunity presented by the Netflix consumer value proposition."

Meanwhile, Martin focused on what she called "heightened fundamental risks" that "suggest valuation multiple contraction, in addition to negative currency translation risks beginning immediately."

She continued: "We note that content fees are typically at fixed rates over multi-year contracts and typically are not based on subscriber levels. Separately, in May, the EU proposed legal changes that would force Netflix to fund European-made films. This implies higher costs and lower returns on invested capital as local content often does not travel well globally. If Netflix choses to exit certain EU markets to avoid these requirements, this would slow international subscriber growth."

The analyst argued that Netflix's shares are "priced for perfection" and that their price is "primarily a reflection of international subscriber growth upside since the U.S. is a mature market."

She estimated that the company had 5 million subscribers in the U.K. plus 6 million in the rest of the EU as of March 31.

Saying the U.K. is likely Netflix's second-largest market after the U.S., Martin argued: "We believe that international subscriber growth in the U.K. and EU is more at risk, owing to dramatic GDP revisions downwards by the International Monetary Fund in a post-Brexit world."

Over the past year, Netflix's stock has traded between $79.95 and $133.27.

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