Netflix's Forward Guidance Will Be 'Hampered By Content Costs, Competition'

Wedbush’s Michael Pachter believes the current stock valuation for Netflix, Inc. NFLX is unwarranted, “given the potential for sustained decelerating domestic growth coupled with consistently elusive international profitability, in addition to increased competition.”

Pachter maintained an Underperform rating on the company, with a price target of $50.

Stock Overvalued

The analyst believes the stock is overvalued, and that the delay in the company’s price hikes scheduled for May has created persisting concerns for investors, especially against the backdrop of slowing domestic growth, which is likely to continue for another quarter as Netflix "un-grandfathers" another 15 million domestic subscribers over the next two months.

“We acknowledge that Netflix has the much more powerful brand for SVOD, but we are confident that with its new standalone service, Amazon.com, Inc. AMZN
declared war on Netflix,” Pachter mentioned.

Related Link: Netflix's Sub Churn Is A Near-Term Headwind But Growth Story Is Intact

Q3 Expectations

Netflix is scheduled to report its Q3 results after market close on October 17, and the analyst expects the results to beat the guidance.

Pachter expects revenue of $2.30 billion, with EPS of $0.07, marginally ahead of the consensus expectations and guidance. The analyst also expect streaming subscriber net adds in line with the guidance.

“We expect sequential Q4 guidance of 4.75 million subscriber net adds, down from 5.59 million last year,” Pachter went on to say.

Rising Content Costs

However, the analyst expects the company to continue to “bleed cash” for the foreseeable future, with content costs rising significantly, while quality was likely to suffer due to the sheer volume of new original content.

“Netflix expects at least another $1 billion growth in spending in 2017, while meanwhile we think that Amazon Video will up the ante for acquiring new content - driving higher content spend for Netflix combined with slowing subscriber growth,” Pachter added.