Netflix Is A Sell: Deutsche Bank Likes The Business, But Not The Stock

Deutsche Bank’s Bryan Kraft believes that the risk-reward on Netflix, Inc. NFLX shares is unattractive, and that the stock is a “very long duration, high multiple investment” with market expectations that could prove to be too high through 2020.

Kraft initiated coverage of the company with a Sell rating and price target of $90. Shares were lower by about 1.5 percent in the pre-market session.

Long Runway For Growth

As a company, however, the analyst believes that Netflix “has a long runway for growth due to its first mover advantage and self reinforcing model.”

Enhancing the user experience and increasing content helps the company drive subscriber growth and pricing power, which in turn funds further content and investment in UX.

Related Link: Subscriber Growth Woes Continue To Haunt Netflix; Company Could Be A Legitimate Target For Disney, Apple

However, Kraft also believes the consensus expectations could be overly optimistic through 2020, given expectations of higher expenses in 2017 and lower revenue in 2018-2020.

In addition, the analyst believes an acquisition of Netflix is unlikely, given that a lack of “compelling strategic rationale and severe economic/earnings dilution are major obstacles to a potential combination.”

Successful Business Model

At the same time, Kraft sees Netflix’s business model as highly successful over the long term, with expectations of 200 million subscribers in 2026, $27 billion in revenue, $8 billion in EBIT and EBIT margin of 28 percent.

The analyst also believes that “Netflix’s pivot to original programming, the development of its own in-house studio, the growth in aggregate studio output, and the size of Netflix’s programming budget” could offset any risk from competition.

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