Netflix and Amazon did very well in 2015 and were the top stocks in the S&P 500 with more than 100% growth. However, both were among the biggest losers on the first trading day of the New Year. On Monday, Netflix shares fell by almost 4%, while Amazon declined almost 6%.
Flattening subscriber growth
Though Netflix has cemented its position in the entertainment business, its days of booming growth might be over, according to one Wall Street firm. Citing the plateauing subscriber count, William Power and Steven Beckert at Baird downgraded Netflix from Buy to Neutral in a research note released on Monday. Referring to a fourth quarter survey, Power and Beckert stated that 46% of respondents confirmed they were Netflix subscribers, compared to 47% in the third quarter and 35% a year ago.
“This appears to point to more flattish Q4 2015 U.S. subscriber progress, and, if accurate, potentially raises some questions around the U.S. subscriber growth trajectory,” the analysts said.
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Four risks to Netflix
Power and Beckert, who believe the company’s large growth has been mostly priced in, gave four major risks that triggered the downgrade. The pair identified “international execution” as the first risk, saying international markets are characterized by lower broadband penetration rates, lower credit usage, and lower TV average revenue per users, and all these together will likely hamper Netflix’s growth in those markets.
The second risk is the “potential for higher churn as price increases rolled through.” Netflix has 40.3 million paid subscribers in the U.S., compared to 41 million for industry bellwether HBO.
“Given the relatively lower monthly price point, we suspect it can out-grow HBO, though the ceiling could be lower than expected,” said the analysts.
Increased competition in the video streaming industry is also seen as a major risk. Netflix not only faces competition from direct competitors such as Amazon and Hulu but also from traditional cable and satellite video providers. Emerging initiatives such as TV Everywhere and Aereo too pose serious threats.
Rising content costs is also seen a major threat by the analysts, who believe the company’s growing push towards increased original programming could negatively affect its profitability and cash flow.
On Monday, Netflix stock closed down 3.86% at $109.96. In 2015, the stock gained almost 121%, while in the last one month, it has lost more than 16%.
