Netflix, Inc. (NFLX) Downgraded By One Firm, Added To Best Ideas By Another

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Netflix, Inc. (NASDAQ:NFLX) was on the receiving end of two opposite analyst reports on Monday as one analyst downgraded it while another had high praise. Needham analysts are concerned about threats to the company’s international expansion efforts due to Brexit, while Guggenheim analysts believe Wall Street is underappreciating the company’s opportunities at home.

Netflix downgraded to Hold

In a report dated July 5, Needham analyst Laura Martin said she downgraded Netflix from Buy to Hold because she believes Brexit introduces fundamental risks in the company’s U.K. and European Union business. She notes that Netflix subscriptions can be canceled at any time and posits that the churn rate in the U.K. and EU will worsen over the next 12 to 24 months along with GDP growth in both areas. She also believes subscriber growth in the two regions will slow as well and that these two issues could lead to contraction in Netflix’s multiple, plus risks of negative currency translation starting immediately.

She adds that content fees are usually at fixed rates over multiple years and usually not based on subscriber levels, which would mean that the company must pay the same amount for content even if its subscriber base shrinks meaningfully. She estimates that Netflix has about 5 million subscribers in the U.K. and 6 million in the EU, placing about one-third of the company’s international subscriptions at risk.

Martin’s view is interesting in that she sees Netflix as a luxury item “paid for with excess cash after rent/ mortgage, food, etc.” Her view is contrasted with others who said that Brexit doesn’t pose a serious risk to the company and, in fact, that it is well-positioned in the event of a recession because it offers a low-cost TV option that is less expensive than traditional cable or satellite TV.

Further, she reminded investors that the EU proposed a new law to force Netflix and other video streaming services to fund European-made films, which would increase costs even further while reducing return on investment as local content usually doesn’t do well globally. She believes Netflix might consider exiting markets where this law is enacted if it passes.

Netflix added to Best Ideas List

Also today, Guggenheim analyst Michael Morris said he added Netflix to his Best Ideas list while maintaining his Buy rating and $150 price target. He said consensus estimates underappreciate the company’s long-term domestic opportunity, which is “presented by an industry-low hourly consumption cost to the consumer.” He continues to expect the company to take usage share from traditional pay TV and sees the possibility of future price increases in the U.S. that what consensus estimates currently suggest.

Netflix shares rose 1.53% to $98.15 during regular trading hours on Tuesday.

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