Netflix Stock Gets Downgrade, Analysts Cut Price Targets

Netflix Co-founder, Chairman & CEO Reed Hastings-Getty-H 2018
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Macquarie Capital's Tim Nollen lowers his stock rating from "outperform" to "neutral" following the streaming giant's third-quarter subscriber and financial update, highlighting that "competition is coming."

Wall Street analysts on Thursday morning shared their takeaways from Netflix's third-quarter earnings report and outlook for the fourth quarter, published after the Wednesday market close, with many cutting their target prices for the streaming giant's stock.

Macquarie Capital analyst Tim Nollen even downgraded his stock rating from "outperform" to "neutral" due to "more modest growth and valuation." While he called the third-quarter subscriber and financial results "comforting," he also highlighted that "competition is coming," starting with streaming services from Apple and Walt Disney in November and from WarnerMedia and NBCUniversal next year. The analyst also cut his target price for Netflix shares by $50 to $325.

"Growth in Netflix’s key metric, subs, is slowing in the U.S., but still strong abroad," Nollen wrote in his report. "Quality of earnings is rising, but so too [are] competition and content cost." But he emphasized: "It’s neither inflecting up nor down, hence we turn neutral."

Competition and maturity is making U.S. subscriber growth more challenging, the analyst noted. "We still think its opportunity is excellent, especially internationally where sub adds should continue to step up," Nollen wrote about Netflix, led by CEO Reed Hastings. "But it’s hard to deny the U.S. is maturing, with sub add growth halving this year ... We expect competition coming from Disney+ and others especially in the U.S. will have only modest effect on churn, but we think it will be hard for Netflix to grow much more in the U.S., and we suspect pricing power is limited."

A slew of other Wall Street observers on Thursday also reduced their stock price targets for Netflix, with CFRA Research analyst Tuna Amobi cutting his by $35 to $365 while maintaining his "buy" rating on the stock. 

Guggenheim Securities Michael Morris dropped his price target on Netflix by $20 to $400, while also keeping his "buy" rating on the stock. "We are confident in the subscriber and economic growth potential of the business over the long term; however, we do expect investors to remain cautious due to the overhang from competition," he wrote in his report. "We are lowering our 12-month price target to $400 from our prior $420 based on higher operating expenses and slightly lower subscriber additions."

Cowen analyst John Blackledge also cut his Netflix stock price target by $20 to $415, while maintaining his "outperform" rating after making what he called "slight tweaks" to his estimates. "Sub adds were mixed, as U.S. missed slightly and international beat," he said about the earnings report. "Net-net, we think it exceeded muted expectations"

And Bernstein analyst Todd Juenger lowered his Netflix price target from $450 to $422, "because it was starting from a point that had run a bit too high, not as a reflection of the quarter results."

"Netflix delivered positively on all things important to us," he wrote. "International paid net adds (where all the future growth is) were an all-time third-quarter high, beat the guide, beat our estimate, beat consensus, grew 23 percent year-over-year ... 'SVOD competition' is still years away in most markets, and when it comes, we think it will do more to grow the market than steal share from Netflix."

Looking at the company's U.S. business, Juenger wrote that "we don't believe 500,000 [subscriber] adds versus 800,000 guide is meaningful." He added: "The bigger argument is whether Netflix has reached saturation. We think not even close. First off, if Netflix hits fourth-quarter guide, they will add 2.7 million U.S. subs in 2019 ... That's not exactly saturated. Also, time is on Netflix's side. As younger demo's age, the impact of higher penetration rolling forward should add 23 million subs over the next 15 years."

Finally, Wedbush Securities analyst Michael Pachter continues to be a big Netflix bear among the Wall Street crowd. In his Thursday report, entitled "Denial Is a River in Egypt," he reiterated his "underperform" rating on Netflix's stock with a $188 price target.

"The company faces a steep uphill climb to replace the content it is slated to lose over the next two years," Pachter wrote. "We estimate that by the end of 2021 Netflix will have virtually no content from Disney, Fox, Warner Bros. or NBCUniversal, and we think its efforts to replace that content with originals will only partially succeed."

Meanwhile, Pivotal Research Group's Jeff Wlodarczak was one analyst who raised his Netflix stock price target on Thursday, boosting it by $50 to $400. "We believe Netflix stock is now set up to climb a wall of worry around the launch of Disney+ (which we view as complementary and a likely accelerant to traditional pay TV losses = positive for Netflix) and AppleTV+ (which in our view is at least a couple of years away — if ever — from being a legitimate threat to Netflix) with what appears now to be a relatively conservative fourth-quarter hurdle," he wrote. "Post results, we raised our previously conservative medium-term operating margin forecasts, tweaked our free cash flow loss expectations lower materially, reduced our U.S. subscriber expectations while leaving our international subscriber forecasts mostly (other than fourth-quarter) unchanged, which drove a $50 increase in our year-end 2020 target to $400."

Concluded Wlodarczak: "In the end OTT services globally still in our view have a material room for growth left (boosted significantly by integration into traditional distributor bundles) in both subscribers and time spent, taking share from traditional media, and Netflix should continue to lead the charge."

After being as much as 10 percent higher in after-market trading, Netflix's stock in Thursday pre-market activity was trending up 7.5 percent.