What does the Amazon.com, Inc. (NASDAQ:AMZN) news of a Prime Video global launch that has the world buzzing entail for Netflix, Inc. (NASDAQ:NFLX)? Wedbush analyst Michael Pachter weighs in with a bullish forecast for Amazon, but bearish on rival Netflix, as he views this rumble towards international expansion as a direct “shot across Netflix’s bow.”
Let’s dive in:
Amazon’s Golden Arrow
Confident that this new expansion to 200 plus countries and territories all while at a fraction of the cost to rival Netflix, the analyst believes this is a golden opportunity for Amazon. As such, Pachter reiterates an Outperform rating on shares of AMZN with a $900 price target, which represents a just under 19% increase from where the stock is currently trading.
Pachter believes, “Amazon is capitalizing on its strong user engagement (its users are used to rating products on its site) by allowing users to rate pilot episodes before greenlighting shows to full seasons. We believe this significantly reduces Amazon’s risk with original content. However, Netflix’s release pattern is far less predictable, in our view.”
Moreover, “We think that Amazon’s existing AWS global infrastructure has allowed it to defray the costs of expanding its Prime Video offering, thereby allowing it to offer its product globally at a reduced price relative to Netflix,” Pachter contends, revealing not only does Amazon have its eyes on Netflix’s corner of the market, the company is entering the picture with a more attractive price for consumers. All roads look profitable for Amazon on back of its Amazon Video expansion.
TipRanks analytics show AMZN as a Strong Buy. Out of 35 analysts polled by TipRanks in the last 3 months, 33 are bullish on Amazon stock and 2 remain sidelined. With a return potential of 25%, the stock’s consensus target price stands at $948.63.
Netflix’s Future Hangs in the Mix
With regards to the way Netflix factors into this global Amazon shake-up, the analyst believes as rival Amazon invests more on original content, content costs will continue to escalate at a detriment to Netflix. This leads Pachter to reiterate an Underperform rating on NFLX with a $60 price target, which implies a close to 52% downside from where the shares last closed.
The analyst notes, “We continue to see the escalation of the content arms race between Netflix and Amazon, and expect to see both companies continue announcing high profile deals in the coming months. Recently, we have seen high cost deals from both companies.”
Netflix’s marketing expenses reached a record high of $282 million in the third quarter, which demonstrates a $66 million sequential surge. Additionally, during the quarterly call, NFLX management revealed come 2017, it has plans to spend $6 billion on content.
With Amazon inciting content costs to rise, Pachter is skeptical that this escalating pace can be “sustainable.” Overall, “Should this continue with other Netflix original series in the future, it is likely to keep the company from achieving ‘economic’ profitability (that is, positive free cash flow) for the next several years. We think that Netflix will continue to spend whatever it takes to attract new subscribers,” Pachter concludes.
With future subscribers “up for grabs” now that Amazon has entered the international streaming ring with its Prime Video offering, the analyst does not foresee this as positive for either Netflix’s near-term international growth prospects nor for its long-term expenses and subscriber growth.
According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Michael Pachter is ranked #4,023 out of 4,279 analysts. Pachter has a 45% success rate and faces a loss of 4.2% in his annual returns. However, when suggesting AMZN, Pachter earns 26.7% in average profits on the stock. When recommending NFLX, Pachter forfeits 44.6%.
TipRanks analytics demonstrate NFLX as a Buy. Based on 35 analysts polled by TipRanks in the last 3 months, 19 rate a Buy on NFLX, 12 maintain a Hold, while 4 issue a Sell. The 12-month average price target stands at $125.59, marking a slight 1% upside from current levels.