Deutsche Bank Starts Netflix (NFLX) at 'Sell'; Sale Unlikely, Says Analyst
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Deutsche Bank initiated coverage on Netflix (NASDAQ: NFLX) with a Sell rating and a price target of $90. Analyst Bryan Kraft said he is positive on the business but cautious on Netflix stock, and he doesn't thinks a sale is likely, as its business is too fully valued to be acquired by Disney (NYSE: DIS) or Apple (Nasdaq: AAPL).
"Netflix has a long runway for growth due to its first mover advantage and selfreinforcing model. Increasing content and user experience (UX) investment drives subscriber growth and pricing power, which funds further content and UX investment. However, we see the risk/reward on the stock as unattractive. This is a very long duration, high multiple investment with market expectations that appear too high through 2020, when most analysts seem to be looking for valuation support. We are skeptical that Netflix will be acquired," said Kraft.
"Lack of a compelling strategic rationale and severe economic/earnings dilution are major obstacles to a potential combination," continued the analyst.
Discussing valuation, the analyst added, "We use our economic returns model, a market-based DCF, to forecast future equity value which we then discount back, using our estimated 12.5% cost of equity, to a 1-year forward target. In Netflix's case, we've used an extended forecast period (through 2026). We begin by capitalizing the growth in unlevered free cash flow at the WACC (12.5%), adding the value creation to enterprise value. We then model the capital structure, including potential share count reduction through share repurchases, to derive a future per share equity value."
Shares of Netflix closed at $104.82 yesterday.
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