Macquarie Downgrades Netflix As Competition Looms

While investors appear to remain stoked about Netflix Inc.'s NFLX third-quarter earnings beat and subscriber growth, Macquarie downgraded the stock, saying growth was good, but it can't go on forever in the face of all the new streaming competition that's coming.

The Analyst

Macquarie's Tim Nollen downgraded the stock from Outperform to Neutral and lowered the target price from $375 to $325.

The Thesis

Nollen appreciates Netflix taking on marks of a "quality growth company," and acknowledged its impressive revenue and earnings growth. But there are others getting into the streaming game.

With the addition into the space of Walt Disney Co DIS's Disney+ and others, Nollen thinks it will be hard for Netflix to grow much more in the United States. He also thinks pricing power is limited, just as content and marketing costs will have to go up. The turn to positive free cash flow will take years, he said.

Nollen lowered U.S. subscription growth forecasts, now expecting low-single digit growth in 2020 and flatlining around 65 million in 2022. International subscription growth should be more robust, though.

"We still think its opportunity is excellent, especially internationally where sub adds should continue to step up," Nollen wrote in a note. "But it’s hard to deny the US is maturing. It’s neither inflecting up nor down, hence we turn Neutral."

Price Action

Investors remained bullish, with Netflix shares trading up 3.7% on Thursday to $296.94.

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