Netflix, Inc. Stock: Divergent Views

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Netflix, Inc. received a huge upgrade last week from analysts at William Blair, and this week it remains a highly polarizing stock. The Blair upgrade was based on a recent proprietary survey conducted by the firm, and RBC Capital Markets analysts reiterated their positive views following their own surveys. However, analysts at Axiom give Netflix stock a hearty Sell rating, and some are calling for a merger of Netflix and Hulu.

Netflix’s domestic challenges abating

In a report dated August 26, RBC analyst Mark Mahaney and team maintained their Outperform rating and $130 price target on Netflix target. They cited their recent surveys in the U.S., the U.K., and Brazil and their analysis of the company’s international profitability.

They said their survey suggests that some of the challenges in terms of penetration and churn in the U.S. appear to be abating in the U.S. as usage levels have soared to record highs. They report that 54% of those who participated in the survey now use Netflix for both movies and TV shows, compared to 50% in May. This also puts Netflix ahead of YouTube at 47% and Amazon at 30%. The RBC team added that Netflix is also now growing faster than both competitors on both a one- and two-year basis.

The RBC team also said that customer satisfaction has “modestly improved” as well, with 67% of Netflix subscribers saying they are “extremely” or “very” satisfied, an increase from 66% and flat with August 2015. We see this as particularly interesting in light of all the attention around the un-grandfathering of long-time subscribers recently, which led to their monthly subscription price being increased to bring them in line with that of newer subscribers.

The analysts also found that while 5% of subscribers are “very” or “extremely” likely to cancel their subscriptions in the next three months, which is the same as in May, the percentage of those who are “extremely likely” edged down from 3% to 2% in August. They learned that 10% of subscribers were “very” or “extremely” likely to cancel due to the price increase which is coming soon, but this is a decline from the 12% that gave these answers in May.

Competition grows in the video streaming space

Growing competition in the streaming space is one of the most common bear arguments against Netflix, but the RBC team also found that 68% of Amazon Prime subscribers also subscribe to Netflix, compared to 51% of regular Amazon customers. However, Axiom analyst Victor Anthony rates the company as a Sell, initiating coverage of the stock with that rating and a price target of $80 per share.

He sees Netflix as having a “super-rich multiple” and faced with growing competition. He also thinks the company’s pricing power is weakening and notes that its contest costs keep rising. He noted that investors have been willing to assign a hefty premium on the company while it enjoyed rapid growth of subscribers, but now that growth is slowing.

The Axiom analyst also questions Netflix management’s claim that price increases were to blame for the slowdown in growth in the most recent quarter. He disagrees and believes that the real issue is competition.

Will Netflix buy Hulu?

Speaking of competition, Seeking Alpha contributor Joseph Bonaccorso suggested on Monday that Netflix and Hulu will merge at some point in the near future, bringing more consolidation in a space which has already seen much consolidation already. He notes that cable TV providers have merged, consolidating within the pay-TV industry, and he argues that Netflix and Hulu will do the same because of rising competition.

He believes the two companies should combine because it would “expand their [Netflix’s] leadership position” and improve its “consumer offerings.” He also sees revenue and operational synergies and believes it would strengthen the company’s “competitive advantage.” Further, he sees cross-selling opportunities between the two companies because he sees them as offering different value propositions. Hulu offers TV episodes the day after they are aired on regular TV, while Netflix offers full seasons and movies much later. As a result, he thinks a combination would combine the diversity of Netflix’s content with Hulu’s posting of current TV shows not longa fter airing.

Currently Disney, Twenty-First Century Fox and Comcast own Hulu, which makes the idea of a merger between it and Netflix seem nearly impossible. Further, Bonaccorso notes that Hulu now supposedly has accumulated $1.4 billion in losses since 2008 and still isn’t profitable, which would weigh on Netflix’s financial position. Analysts expect Hulu to be profitable by 2020, which could mean that the current owners won’t be ready to sell any time soon.

Shares of Netflix declined by as much as 0.03% to $97.27 during regular trading hours on Tuesday.

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