Netflix and Amazon, which reported impressive second-quarter numbers, are among the best performing stocks on the Nasdaq in July. On Monday, SunTrust Robinson Humphrey analyst Robert “Bob” Peck was on CNBC to discuss the outlook for the stocks.
Few risks for Netflix going forward
Netflix continues to grow its robust base along with raising pricing as well, the analyst said. On the other hand, Amazon is expanding its core profitably along with growing its cloud service. “So, both have had strong fundamentals justifying their movements,” said Peck.
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On the challenges that the companies will be facing going forward, Peck notes for Netflix, the cost of acquiring customers has been rising sharply, which poses a risk for the streaming firm. In addition, the firm has a content obligation of more than $7 billion, and on the valuation side the company trades at around 100 times EBITDA “this year, 75 times forward and 50 times 2017,” says Peck, adding “So, a lot of things baked in there.”
For Amazon, the analyst notes the expansion of the company’s cloud service has been “particularly profitable.” So, the risk could be a “pricing pressure” that could lower the profits. On the valuation front, the stock is trading at 70 times free-cash flow, which the analyst feel is “not particularly cheap.”
On being asked to choose from the two, Peck said, “Well, we love both companies,” adding that as of now they are not recommending both the stocks due to the valuation parameters. But, in case of a pullback in the valuations, the analysts believe “both of them have long secular winds at their back are fantastic companies. So, it’s more just being picky on valuations.”
Netflix “growing like a weed”
Separately, media analyst Rich Greenfield told CNBC that more and more viewers are giving up their cable and satellite channel bundles for Netflix and other direct-to-consumer offerings. The analysts noted that advertising is growing overall, but for TV it is declining. Greenfield noted that the lack of advertising is creating a problem for the “traditional media because eyeballs are shifting.”
Greenfield believes apart from replacing HBO, Netflix aims to add Discovery-like content. Chef’s Table was one of their most popular shows last quarter, the analyst said, adding the company is “growing like a weed.”
In pre-market trading Tuesday, Netflix shares were up 0.48% at $113.10, while year to date the stock is up almost 130%.