Investor Concerns About Netflix's Competition, Content Costs 'Misplaced'

UBS upgrades Netflix, Inc. NFLX to Buy from Neutral, as it sees upside to the company’s first-quarter subscriber guidance given momentum in Europe and LatAm, and modest improvements in Japan.

The upgrade is based on UBS' analysis of app download data that showed improving momentum across many of Netflix’s global markets, while customer surveys reveal strong brand affinity and high user satisfaction regarding ease of use and content selection.

First-Quarter Momentum

“Notably, this momentum is during a 1Q17 stretch where original content releases are light and 1Q17 growth had been pulled forward into 4Q16 per management due to 4Q16's strong originals,” analyst Doug Mitchelson wrote in a note.

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Analyst's Commentary

Mitchelson, who also raised his price target to $175 from $136, sees the potential for Netflix to exceed Street subscriber growth expectations and believe that concerns regarding competition and content costs are “misplaced.”

The analyst, who projects 20 percent subscriber growth in 2017, sees first quarter int'l net additions of 4.1 million versus guidance and consensus of 3.7 million. The analyst also raised his 2017 int'l net additions view by about 800,000 to 14.6 million, while the U.S. remained unchanged at 4.4 million for 2017. Mitchelson expects 2017 EPS of $1.06.

A Look Forward For Netflix

Moreover, Mitchelson do not expect competition to directly impact Netflix’s subscriber growth over the near- to mid-term, though it may push content costs higher longer term.

“We believe Netflix's core competencies in both content & technology will drive a virtuous circle of greater subscribers and increased viewing time, enabling ever higher ARPU and revenue,” Mitchelson added.

That said, he is concerned over the potential for Net Neutrality rules to be eliminated by the Republican FCC.

Shares of Netflix closed Friday’s regular trading at $139.14. In the pre-market hours Monday, the stock was seen up 1.12 percent to $140.70.