UBS downgrades Netflix, calling shares overvalued after 75% rally from COVID-19 lows

• Netflix shares' risk-reward profile is becoming increasingly unattractive as investors ignore major risks and pile in, UBS said Tuesday.
• The firm downgraded Netflix to "neutral" from "buy" while reiterating its $535 price target.
• Investor debates around new competitors, rising content costs, and lasting subscriber growth "have disappeared at current levels," the team of analysts wrote.
• "We would rather be constructive" at levels where such concerns are better factored into Netflix's stock price, they added.
• Watch Netflix trade live here.

Investors looking to benefit from streaming services' surging popularity should wait before rushing to Netflix, according to UBS.

The bank downgraded Netflix shares to "neutral" from "buy" on Tuesday while maintaining its $535 price target. The streaming giant is set to report a "widespread benefit" from virus-prompted lockdowns when it releases earnings data on Thursday.

Recent crowding in the company's stock has skewed its risk-reward profile, the bank's analysts said. Netflix's lofty valuation prices in sustained user, revenue, and profit growth despite lasting economic damage. Meeting those goals will likely prove more difficult than the stock price currently implies, UBS said.

"In our opinion, NFLX's long-term narratives remain intact but we would rather be constructive at levels when a mix of potential subscriber volatility, [free cash flow] dynamics, and competition are better reflected in the share price," the team of analysts led by Eric Sheridan wrote in a note.

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Netflix traded as much as 6.6% lower on Tuesday following the downgrade. The slide dragged the Nasdaq composite to underperform other major US indexes.

Shares have already spiked on strong optimism for the company to benefit from stay-at-home activity. Netflix closed Friday up roughly 75% from mid-March lows after rallying in recent months. While the firm remains the leader in streaming, investor debates around new competitors, content costs, and cash flow "have disappeared at current levels," UBS said.

Other analysts have raised similar concerns. Bank of America lifted its price target for Netflix on Monday to $625 from $525, but cited increasing content costs and a sooner-than-expected saturation point as key downside risks. A deep recession could also drive higher subscriber churn, the bank added.

Wedbush Securities maintained its "underperform" rating on Netflix on Tuesday, Bloomberg reported. The firm expects content spending "to trigger substantial cash burn for many years."

Netflix traded at $504.92 per share as of 10:35 a.m. ET Tuesday, up about 57% year-to-date.

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