Netflix's Stock Has Volatile Week as Wall Street Continues to Debate Its Outlook
NEW YORK – Without much fanfare, Netflix shares this week crossed the $300 mark for the first time and hit an all-time high of $304.79 - only to end the week lower than the previous week.
It was a volatile week for the stock as the online streaming and DVD rental service introduced new pricing plans, which led to discussions among customers and Wall Street observers alike. After hitting a record high, the stock of the company, which is led by CEO Reed Hastings, finished Friday at $286.93, down from its $295.14 close a week earlier.
In line with the mixed signals sent by Netflix’s stock, analysts had different takes on the effect of the firm’s pricing changes. And their stock ratings and target prices for the company remain all over the place as well.
Among the bulls, Goldman Sachs analyst Ingrid Chung, who has the stock on her firm’s Americas buy list with a $330 target, argued that the “ large pricing increase should more than offset resulting high churn.”
Her rationale: “The lower-priced hybrid subs (one DVD out) are being forced to make a decision as to how important having the DVD option is to them. We see the vast majority of high-priced subs staying put and paying 20 percent-30 percent increases.” Overall, profitability should improve “as we believe that the majority of lower-priced subs were less profitable for Netflix,” she argued. “According to our scenario analysis, a very high number of subs would have to churn off to offset the pricing increase.”
Similarly, BMO Capital Markets analyst Edward Williams, who has a “market perform” rating and a newly raised $280 target price on the stock, said that the “new pricing [is] a potential catalyst” for the stock.
But Lazard Capital Markets analyst Barton Crockett maintained his similar “neutral” rating in a report entitled “Domestic price change: Why annoy so many right now?” His firm doesn’t use price targets on neutral-rated stocks.
“Netflix's move to disaggregate streaming and DVD by mail, forcing customers to pay 60% more to retain both in the core one disc out plan, has annoyed a broad swath of users, with thousands of complaint posts,” Crockett wrote. “While Netflix can test new offers to new subs, it has limited ability to test price changes for existing subs, raising execution risk for a jarring change.”
He predicted an increase in subscriber turnover, lower average revenue per user and a reduction in DVD usage.
Janney Montgomery Scott analyst Tony Wible has a $170 fair value estimate on Netflix shares and a “sell” ratings. “The [pricing] move has
been applauded by the bulls as a sign of pricing power, but we believe the move shows that Netflix’s old pricing model was unsustainable as the company was losing money on a cash basis, which it masked through accounts payable increases and accounting treatments on the income statement,” he suggested. “The push into Latin America, the looming Starz renewal and the massive uptick in off balance sheet obligations increase the cash pressure on the business and were likely factors for Netflix to drastically increase pricing.”
Wedbush Securities analyst Michael Pachter is similarly bearish on Netflix with an “underperform” rating and price target of only $80.
“The long-term impact of these changes remains unclear,” he said about the new pricing. His estimate is that “on balance, any increase in revenues from higher-priced combination plans and the re-introduction of DVD-only plans will be offset by subscriber migration to lower-priced alternatives as well as Latin American start-up costs.”
Netflix’s market capitalization as of Friday’s close stood at $15.07 billion.