Netflix, Inc. (NASDAQ:NFLX) shares have risen dramatically over the last six months, and they could keep going up in the near term, according to analysts at Macquarie. But after that, it’s anyone’s guess. Macquarie analysts remain concerned that the long-term burden of content costs will present significant downside to the stock.


Macquarie Capital analysts Tim Nollen and James Kopelman released a report to investors this week. They remain neutral on the stock because they see good near-term trends but big problems in Netflix, Inc. (NASDAQ:NFLX)’s ability to sustain subscriber growth and keep it above the amounts it is spending on content.

Netflix’s Original Content Strategy

The analysts note that Netflix, Inc. (NASDAQ:NFLX)’s decision to produce several original series over the next year or two will likely bolster its subscribership. In particular, the streaming video company brought back the popular comedy Arrested Development, which was once on Fox but ended up being cancelled six years ago.

Netflix will release 15 new episodes of the series on May 26, and Nollen and Kopelman say that the company will see lower churn in the series during the second quarter as subscribers watch all of the series’ past seasons and then stay with the company through June to finish watching the new season.

The company’s original series House of Cards boosted subscribership during the first quarter, so it’s likely that Netflix will see similar results from Arrested Development in the current quarter. If so, then the company could do even more original series, possibly another 10 to 20 more new shows by 2015.

The analysts are wondering just how Netflix will do as it shifts away from network content and toward its own content because this is an untested model for video streaming companies. The stakes are high for Netflix because it’s attempting to turn itself into a provider of more exclusive content.

Content Cost Problems Likely Ahead For Netflix

As Netflix, Inc. (NASDAQ:NFLX) continues to spend more on original content, the company will likely see its content costs rise. It said it wants to see sequential improvement of 100 basis points in U.S. contribution margin each quarter, and it seems to indicate that it will favor original content over library content.

In their view, they believe it’s risky, so they think Netflix will have to pay for both original and library content in order to keep subscribers. They believe the company’s operating margins could become negative again if Netflix keeps up its current level of content spending while it also meets its content obligations and raises its spending on original series.

Nollen and Kopelman said if Netflix, Inc. (NASDAQ:NFLX) continues to do all three, its subscriber base will have to swell by 37 million next year and 49 million by 2016. Currently the company is at 29 million subscribers.

Revisions To Netflix’s EPS And Target Price

The analysts adjusted their estimates, raising their adjusted 2013 earnings per share estimate by 19 percent to $1.57 per share but slashing next year’s earnings per share estimate by 7 percent to $2.94 per share. They also raised their target price for shares of Netflix, Inc. (NASDAQ:NFLX) to $230 per share from $180 per share.