UPDATE: Morgan Stanley Cuts Netflix (NFLX) to Underweight as Competition Increases

January 7, 2014 6:40 AM EST
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(Updated - January 7, 2014 2:16 PM EST)

Morgan Stanley downgraded Netflix (NASDAQ: NFLX) from Equalweight to Underweight with a price target of $310.00 (from $333.00). Analysts believe increased competition from alternative products could put the Street's long-term domestic sub forecasts at risk. Viable alternatives include Amazon Prime Instant Video, HBO GO, and Hulu Plus.

"We expect competition in US digital video streaming to grow tighter in 2014 as services like Amazon Prime Instant Video, HBO GO, and Hulu Plus offer compelling alternatives to Netflix's service and each could corner specific segments of the market. This could challenge Netflix's gross subscriber growth and lead to higher US marketing / content costs," said analyst Scott Devitt.

"Even if Netflix's churn levels fall to record lows, we estimate that over 48MM out of 92MM residential broadband households (~53%) would need to watch Netflix over the next 12 months to meet our 2014E domestic sub forecast of 39MM. If monthly churn is closer Netflix's long-term average of ~4%, the number of households would need to reach ~52MM (~57%)," added the analyst.

Given the stock's recent trading range, Devitt thinks the market is pricing in 60-65 million US streaming subs for Netflix over the long-term. Based on Morgan Stanley's estimates, this would require nearly 57-62% penetration of estimated 2022 broadband households with 80% potentially using Netflix.

Morgan Stanley's $310 price target is based on 47x 2015 EPS.

For an analyst ratings summary and ratings history on Netflix click here. For more ratings news on Netflix click here.

Shares of Netflix closed at $359.57 yesterday.

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