Netflix’s domestic subscriber base is a new battleground for bulls and bears as one firm downgraded the company’s stock and slashed its price target. Jefferies analysts believe the market is overestimating the video streaming company’s U.S. subscriber trajectory. However, Bank of America Merrill Lynch analysts are highlighting the deal with Comcast as a huge new positive for Netflix’s U.S. business.
Netflix tumbles amid Jefferies downgrade
It looked like Netflix shares were going to snap their multi-day winning streak on Tuesday, but then the news about the deal for Comcast to add the company’s app to its X1 platform gave them a boost. On Wednesday, however, Jefferies analyst John Janedis and team said they have assumed coverage of Netflix and downgraded it from Hold to Underperform. They also slashed their firm’s price target from $120 to $80 per share, which sent the company’s shares tumbling. Their downgrade follows another from Needham analysts on Tuesday.
Jefferies analysts said Netflix’s first mover advantage is beginning to erode as competition in the video streaming space grows. Additionally, they believe content owners in the U.S. are becoming more selective in terms of licensing content to the company, which of course will impact the size of its catalog.
Netflix’s U.S. business in focus
However, a bigger concern for them is the trajectory of its U.S. subscriber growth. They note that management guided for a long-term target of 60 million to 90 million subscribers from 47.9 million paying subscribers in fiscal 2016. They add that the low end of the range implies that Netflix will have a 52% penetration rate of broadband homes in the U.S., compared to the 44% the company had in 2015. This would be far ahead of its peers, the Jefferies team explains. Because of the current penetration rate and increasing competition, they expect the company’s domestic growth to moderate.
They still see a large opportunity in international markets, but they don’t believe international growth will be linear. They expect growth in some markets, especially emerging markets and non-English speaking markets, will be more challenging as limited local content is available and there are language barriers. Also some markets carry high expenses with entering them.
Netflix to benefit from Comcast deal
Bank of America Merrill Lynch analyst Nat Schindler and team have a Buy rating and $146 price objective on Netflix, and their July 6 report highlighted the Comcast deal. With the addition of the company’s app to the X1 set-top box platform, Netflix gains access to another 22.4 million TV subscribers. The new distribution deal is expected to begin sometime in the second half of the year. Comcast is the first major U.S. cable company to add streaming access to its main cable box system. Although neither Netflix nor Comcast disclosed any of the financial details, the BAML team believes Netflix will pay Comcast for new subscribers on the platform, which would fall under marketing expenses for Netflix.
They said the Comcast deal will help the video streaming giant expand its reach in the U.S. significantly as past set-top box deals have been with smaller U.S. operators. In addition to expanding reach to households that don’t have a streaming media player, they see the potential for Netflix’s subscription to be integrated into monthly cable bills, thus increasing stickiness. Additionally, the deal provides the video streaming company stronger positioning for similar deals with other pay-TV providers.
Netflix shares tumbled by as much as 3.55% to $94.43 during regular trading hours on Wednesday.
