Long viewed as the streaming king and an entertainment pioneer, is the competition starting to catch up to Netflix (NFLX)?
With Apple recently announcing it would launch its answer to Netflix later in 2019, it seems every tech and entertainment company is giving streaming a shot. While Netflix is still the unquestioned leader in the space — with 139 million members as of January — customers are getting increased alternatives at varying prices, from Hulu’s $45/month live-TV service to Pluto TV’s ad-supported free entertainment platform. But not only is competition increasing, usership numbers domestically can’t go much higher — the company has grown to more than 60 million US subscribers.
As such, analyst Mark Zgutowicz of Rosenblatt Securities initiates coverage on Netflix stock with a Neutral rating and price target of $350, which implies about 6% downside from current levels (To watch Zgutowicz’s track record, click here)
Zgutowicz believes Netflix shares are “priced to perfection, particularly against aggressive international subscriber expectations.” Furthermore, the analyst’s domestic subscriber expectations imply NFLX continues to dominate household streaming share despite new, big pocket DTC entrants with top-shelf original content. But, Zgutowicz sees “greater downside risk from rising original content competition (i.e. Disney+, Hulu) vs. upside risk to exceeding our expectations,” which pushes his price target below the stock’s current value.
To Zgutowicz, the competition isn’t Netflix’s problem. The analyst says, “Netflix will continue to be successful domestically, despite increased competition on the horizon.” And despite “a variety of streaming services entering the market over the next year run by deep pocketed companies aiming to produce high quality, original and exclusive content,” the analyst expects “Netflix to continue to be the leader in the domestic streaming market and benefit from increased cord cutting.”
But it’s because of Netflix’s domination that production companies that once sold to Netflix have decided to go the streaming route, which, in turn, has forced the company to spend on original content. And this is where Zgutowicz is concerned. He sees “Netflix content amortization reaching ~$16B in five years with cash content spend approaching $20B.” He says this is “well below what we expect a combined DIS/Fox will spend,” which will contribute to putting “upward pressure on our already elevated NFLX content investment forecast.”
Netflix’s stock is still among Wall Street’s favorites. The stock price skyrocketed 30% in the first two weeks of 2019, and has remains stable since then. TipRanks analysis of analyst ratings shows more good is to come. Of 32 analyst ratings, 24 analysts recommend a Buy, six suggest a Hold and two remain bearish with a Sell rating. The consensus price target stands at $401.23, which implies nearly 8% upside from current levels. (See NFLX’s price targets and analyst ratings on TipRanks)
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