Analyst Says Now is a Great Time for Netflix (NFLX) Sell

December 5, 2012 12:30 PM EST
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Price: $133.70 +3.50%

Rating Summary:
    32 Buy, 23 Hold, 10 Sell

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Netflix (Nasdaq: NFLX) is dipping today after announcing a new deal with Disney (NYSE: DIS) on Tuesday, which bolstered investor confidence and allowed shares to close 14 percent higher on Tuesday. One analyst, however, isn't convinced that Netflix should have moved that much higher, or higher at all, on the news.

Rich Tullo at Albert Fried & Co thinks that the bump higher is a great time to sell. He has several points:
  • Netflix may be paying $400 million to $500 million annually to the rights;

  • The deal is multi-phase, with sub-prime content being made available immediately. Tullo thinks Netflix will pay Disney an upfront fee or option for the content starting in 2013;

  • Tullo thinks the "exclusive deal" might be less prestigious than investors think. He comments, "we cover AMCX (UW) which also has an “exclusive deal with NFLX” AMCX’s content is available on any one of about 25 major cable companies servicing 100 million subscribers and it is also available on any number of international platforms as well as iTunes and AMZN, so only time will tell if this is a true exclusive";

  • Given that most of Disney's content will be viewed repeatedly by kids, Tullo thinks it's a "buy-versus-lease" decision and most would rather pay $7.99 for a copy kids can watch on a media tablet;

  • The second part of the deal calls for Netflix to get more premium content starting in 2016. Until then, it'll be the "some old Disney cartoons which everyone has on DVD or gets on Disney Kids or iTunes already and some spectacular art in the form of Direct to DVD releases some of big direct to DVD hits are Daddy Day Camp, Dr. Dolittle IX… (sans Eddie Murphy)...Disney Fairies and First Date Lassiter. Our guess is movies like these won’t be a revenue driver despite today’s stock move and could even irritate NFLX subs as it is more of the same types of content which consumers hate on NFLX; old and ugly."

Tullo notes that if the deal includes LucasFilm content, it might be worth $300 million to $550 million, or $10 per share in added expenses and content liabilities. Netflix would have to add 7 million to 10 million subs to make up the difference, which is 2 million above Tullo's projections.

Tullo thinks that Disney deal and a potential deal with Sony (NYSE: SNE) will erode shareholder value. To that end, he sees Netflix offering up $1 billion to $2 billion in convertible bonds, or exchanging shares for content. In either case, he expects "tens of points or billions of downside risk" for Netflix.

Shares are down 2.9 percent on the session Wednesday. Albert Fried and Tullo rate Netflix at Underweight with no price target.

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