Needham Downgrades Netflix, Cites 'Rising Growth Risks'

Needham’s Laura Martin believes that the Brexit vote increases fundamental risk associated with decelerating GDP growth in the U.K. and E.U. over the next 12 to 24 months, which could lead to accelerated subscriber churn for Netflix, Inc. NFLX or slower subscriber growth.

Martin downgraded the rating on the company from Buy to Hold.

“These heightened fundamental risks suggest valuation multiple contraction, in addition to negative currency translation risks beginning immediately,” the analyst mentioned.

Multiple Risks

In addition, Martin pointed out that the E.U. had proposed legal changes in May 2016, which would require Netflix to fund European-made films, which in turn would lead to increased costs and lower ROICs, since local content usually does not work well globally.

“If NFLX chooses to exit certain EU markets to avoid these requirements, this would slow international subscriber growth,” Martin stated.

Netflix had 5 million subscribers in the U.K., apart from the 6 million subscribers in the E.U., as of May 31, 2016.

This means that a third of the company’s 32 million international paying subscribers and revenue are facing risk in the event that GDP slows in the region.

“We believe that a NFLX subscription is a luxury item, paid for with excess cash after rent/mortgage, food, etc. EU and UK GDP’s slowing over the next 2 years implies slower job growth and lower consumer FCF to pay for NFLX subscriptions than our estimates 3 wks ago,” according to the Needham report.