Netflix stock slipped on Monday following an initiation report from analysts at Deutsche Bank, who set a $90 price target for it. They are positive on Netflix the business but negative on Netflix the stock. They also discounted the rumors that companies such as Apple or Walt Disney were looking at the video streaming service as a potential acquisition target, saying that it is very unlikely that it will be bought out.
Netflix stock rated a Sell
In a report dated October 9, analyst Bryan Kraft initiated coverage of Netflix stock with a Sell rating and said that the company has a “long runway for growth due to its first mover advantage and self-reinforcing model.” He believes that increasing the amount of content and growing user experience investments boosts growth in subscribers and also raises pricing power, which in turn provides funds to add even more content and invest even more in the user experience.
However, Kraft sees the risk/ reward on Netflix stock as “unattractive,” saying that it is a long-term investment because he believes market expectations are just too high through 2020. While Sell ratings on the stock are relatively rare, it did receive the equivalent of one (Underperform, in this case) from Macquarie as well about a month ago.
Netflix may underperform consensus… for now
He’s behind consensus on EBIT for every year through 2020. He expects the company’s expenses to be higher than what most are expecting in 2017, but then in 2018-2020, he expects Netflix’s revenue to be less than what consensus projects. His cumulative EBIT estimate for 2017 through 2020 is 27% behind consensus, and his earnings per share estimate for the same timeframe is 32% behind.
Kraft describes Netflix’s business model as “very successful” over the long term, however, as he’s expecting it to have 200 million subscribers in 2026, compared to the 83 million it has currently. He expects the company to have $27 billion in revenue that year, compared to only $9 billion this year, and $8 billion in EBIT, compared to this year’s $200 million. He projects an EBIT margin of 28% for 2026 as well.
If the analyst’s calculations are correct, then Netflix will eventually grow to be the size Time Warner is currently. It would also imply that investors who own Netflix stock right now will see a return of about 7% if they hold it through 2026.
Puts and takes for Netflix
Kraft believes Netflix is just too fully formed and valued for Apple or Walt Disney to acquire it, and he sees no compelling strategic reason for it to be acquired. He also sees “severe” economic and earnings dilution as being big obstacles to a merger, including 25% earnings per share dilution for Disney in particular.
He disagrees with those who say that Netflix is starting to have problem accessing content because this risk is mitigated by the company’s shift toward original in-house content. He also downplayed the risk from competition, which has become a heated debate on Wall Street. Kraft called Netflix “a complement to pay TV” for most users in the U.S. and a success in international markets “where local TV incumbents have failed.” As a result, he expects the company to continue its trend of success, although he does see Amazon as the one to watch in the streaming wars.
Shares of Netflix stock declined by as much as 1.19% to $103.57 during regular trading hours on Monday.