Netflix Analyst Downgrades Stock, Says Streaming Service Lacks Operating Leverage

Netflix Inc NFLX has done an exceptional job gaining streaming market share among cord-cutters, but one analyst downgraded the stock on Tuesday and said shares are overvalued given Netflix’s lack of pricing leverage.

The Analyst

Citi analyst Jason Bazinet downgraded Netflix from Buy to Neutral and cut his price target from $410 to $325.

The Thesis

Bazinet said Netflix is the clear market leader in the streaming video on demand market. It has also done an impressive job of investing to build its subscriber base, adding about 7 million net subscriber adds for each additional $1 billion in annual content spend over the past eight years.

However, Bazinet said Netflix’s challenge lies in its lack of operating leverage.

In recent years, the vast majority of Netflix’s growth has come from subscriber additions, which is an unsustainable model in the long-term, he said. Looking ahead, Netflix needs to demonstrate it can generate growth via price hikes. Given the highly competitive environment in which Walt Disney Co DIS just significantly undercut Netflix in pricing its Disney+ service, Bazinet said Netflix is unlikely to gain pricing leverage anytime soon.

“Pricing power above historical cadence is unlikely until the majority of Netflix’s US subs are cord-cutters and competition moderates,” Bazinet wrote in a note.

Bazinet said long-term Wall Street estimates are too high given Netflix’s projected content spend.

Benzinga’s Take

The long-term Netflix bull case involves the company raising prices to better monetize its massive global subscriber base. For Netflix to effectively squeeze its existing customers, those customers must first view Netflix as indispensable and not just one of several appealing streaming options.

Netflix's stock traded down 2% to $303.68 per share at time of publication.

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