Wall Street is souring on Netflix ahead of earnings. Here's why 6 firms have cut their price targets in recent weeks.

Daniel StraussOct 16, 2019, 18:05 IST

Netflix

Netflix's third-quarter earnings report is going to be critical for the company to prove to investors it can weather the onslaught of streaming competitors set to flood the space in the coming months.
The streaming giant has lost more than 20% of its market value since it reported its first decline in US subscribers since 2011 during the second quarter of 2019.
In the weeks leading up to Netflix's third-quarter earnings results, a slew of Wall Street banks have slashed their price targets amid looming competition and concerns about future subscriber growth.
Here's why six analysts have soured on Netflix's stock in recent weeks.
Watch Netflix trade live on Markets Insider.

Netflix will release quarterly earnings on Wednesday after the closing bell. It will be company's last report before the introduction of several new streaming services from companies like Disney and Apple.

The combination of (1) subscriber growth concerns following Netflix's disappointing second-quarter results and (2) the prospect of new platforms crowding the streaming space has weighed on shares in recent months.

Netflix's stock has lost more than 20% of its value since its second-quarter earnings release in mid-July which showed the first US subscriber decline since 2011. The prolonged sell-off has erased most of Netflix gains for the year, leaving the stock up just 6% - less than one-third the S&P 500's return over the period.

Investors and analysts are expected to pay particularly close attention to whether Netflix could hit it forecast of 7 million net subscriber additions in the third quarter in an effort to bounce from the second-quarter decline.

A host of Wall Street firms have lowered their price targets in the weeks leading up to Netflix's earnings report. Several of the analysts reiterated their "buy" ratings on the stock, but also acknowledge the headwinds it could face as streaming competition intensifies.

The contest for eyeballs has pushed companies racing to secure premium content and crank up spending on original TV shows and movies. Netflix plans to spend as much as $15 billion on content in 2019 alone, eating into free cash flow and earnings.

The company's ballooning content costs and the impact of new entrants on subscriber growth has led analysts to reevaluate their forecasts and valuations.

Here's are six Wall Street firms that have cut their price targets for Netflix over the last several weeks, with their reasoning explained:

See Wall Street is souring on Netflix ahead of earnings. Here's why 6 firms have cut their price targets in recent weeks. >>

Morgan Stanley: "The market's view of Netflix has not been this cautious for some time."

Price target: Lowered to $400, from $450

Rating: Overweight

"The market's view of Netflix has not been this cautious for some time," Morgan Stanley analyst Benjamin Swinburne said in a note to clients on October 14.

He continued: "The risk is that Netflix lacks the content 'franchises' to prevent consumers from hopping in and out of the service, keeping churn elevated. At the same time, new streaming options on the margin could shave off some gross additions."

UBS: "We modestly lower our multiples to reflect our more conservative view of an increasingly competitive environment."

Price target: Reduced to $370, from $420

Rating: Buy

"We modestly lower our EV/GAAP EBITDA and EV/(FCF-SBC) multiples to reflect our more conservative view of an increasingly competitive environment in the near-to- medium term," UBS analyst Eric Sheridan wrote in a note to clients on October 9.

He continued: "We see a multiple quarter path back to highs if NFLX can successfully navigate a better than expected Q3'19."

Goldman Sachs: "We expect 0.7mn domestic and 6.0mn international paid net subscriber additions, modestly below guidance."

Price target: Cut to $360, from $420

Rating: Buy

"In 3Q, we expect 0.7mn domestic and 6.0mn international paid net subscriber additions, modestly below guidance," Goldman Sachs analyst Health Terry wrote in a note to clients on October 10.

Terry added: "With NFLX trading at nearly a 5-year low on an NTM EV/EBITDA basis, reflecting uncertainty around results and competition, we remain Buy rated (CL), though our 12-month price target goes to $360 from $420."

Pivotal Research: "The key for the stock would be for NFLX to make their 3Q subscriber guidance and have reasonable 4Q guidance."

Price target: Slashed to $350, from $515

Rating: Buy

"We are reducing our year-end '20 NFLX target price substantially based on materially higher than forecast market content cost inflation," Jeffrey Wlodarczak, an analyst at Pivotal Research Group, said in a note to clients on September 24.

He continued: "We noted that NFLX stock would potentially have issues working in front of the launch of Disney + and Apple TV + but that the key for the stock would be for NFLX to make their 3Q subscriber guidance and have reasonable 4Q guidance."

Monness Crespi Hardt: "We are lowering our 2019 paid global streaming subscriber estimate to 161.9 million from 166.4 million."

Price target: Cut to $340, from $440

Rating: Buy

"We are lowering our 2019 paid global streaming subscriber estimate to 161.9 million from 166.4 million and reducing our 2020 forecast to 185.1 million from 197 million," Monness Crespi Hardt analyst Brian White wrote on October 9.

He continued: "As Netflix continues to aggressively invest back into the business with new content, the company's operating margins remain well below the company's long-term operating margin target at maturity."

Rosenblatt: "We also believe competition will lead to adverse impacts on content spend and pricing power, impacting FCF generation and revenue growth."

Price target: Lowered to $265, from $330

Rating: Neutral

"We also believe competition will lead to adverse impacts on content spend and pricing power, impacting FCF generation and revenue growth, respectively." Rosenblatt analyst Bernie McTernan wrote in a note to clients on October 8.

McTernan added: "While the stock could be attractive if $15B was enough to spend on content over the long-term, we see competition and growth aspirations pushing it higher, making FCF valuation difficult to justify."

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Wall Street is souring on Netflix ahead of earnings. Here's why 6 firms have cut their price targets in recent weeks.

Morgan Stanley: "The market's view of Netflix has not been this cautious for some time."

UBS: "We modestly lower our multiples to reflect our more conservative view of an increasingly competitive environment."

Goldman Sachs: "We expect 0.7mn domestic and 6.0mn international paid net subscriber additions, modestly below guidance."

Pivotal Research: "The key for the stock would be for NFLX to make their 3Q subscriber guidance and have reasonable 4Q guidance."

Monness Crespi Hardt: "We are lowering our 2019 paid global streaming subscriber estimate to 161.9 million from 166.4 million."

Rosenblatt: "We also believe competition will lead to adverse impacts on content spend and pricing power, impacting FCF generation and revenue growth."