Netflix's (NFLX) Rating to Cut to 'Underperform' at Macquarie as Analyst Sees Challenges

September 13, 2016 7:05 AM EDT
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(Updated - September 13, 2016 11:34 AM EDT)

Macquarie downgraded Netflix (NASDAQ: NFLX) from Neutral to Underperform with a price target of $85. Analyst Tim Nollen thinks the company will do well longer term but he sees near term challenges due to high content costs, increasing competition from Amazon in the US, and competitive markets in many other countries.

Nollen is skeptical of Netflix’s international launch efforts due to lack of compelling content, and he sees below consensus international subs of 73 million by 2019. Macquarie's prior 2019 international subs estimate was 91 million.

"Many countries Netflix is expanding into have been growing pay TV markets with incumbent operators that have invested in VOD/SVOD offerings, often as add-ons to existing subscriptions. In addition, numerous SVOD services have gotten off the ground, often at cheaper prices and offering more local content," said Nollen, discussing potential difficulties with international expansion.

The analyst continued, "We believe success will require partnering with local content providers and/or investing in more local content, or in content that will travel. This will be expensive – indeed, Netflix’s total content obligations have ballooned to $16-18bn including “unknown” off-balance sheet commitments, and could well rise further. We have developed a model that we’ve accurately employed before to forecast Netflix’s 3-year P&L content costs, which we work into our assumptions, leading us to cut EPS estimates in 2017, 2018 and 2019."

Discussing U.S. markets, Nollen said, "US growth could also be tougher in the near term, with more competition from Amazon, which is doubling its content spending this year, and a plethora of OTT options coming to market, from HBO Now to skinny bundles to virtual MVPDs like Hulu Plus. These will all compete for producers’ content and consumers’ time."

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 $99.05 yesterday.

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