Will Netflix Be Drowned By The Content-On-Demand Wave It Helped Create?

While delivering strong subscriber growth in Q4 2016, Netflix, Inc. NFLX management indicated that these gains could moderate in Q1 2017 amid tough comps.

The company’s stock valuation continues to be “significantly higher than peers,” Argus’s Joseph Bonner said in a report. He reiterated a Hold rating on the company.

Bonner raised the EPS estimate for 2017 from $0.67 to $1.22.

Increasing Woes

“Netflix’s core strategy is to grow its internet streaming subscription business both domestically and internationally,” Bonner noted. He added, however, that the costs associated with increased original productions and content licensing had led the company to take on more debt, which would adversely impact margin expansion.

Netflix has a high cash burn rate, which continues to rise. The company had a free cash flow deficit of $1.66 billion in 2016.

“Although Netflix is benefiting from the secular growth of internet-delivered on-demand video, it is also attracting a host of competitors,” the analyst mentioned. The company was facing competition from:

• Its own content suppliers, like Time Warner Inc TWX, Walt Disney Co DIS and HBO.
• Incumbent distributors, like DISH Network Corp DISH and Comcast Corporation CMCSA.
• Deep-pocketed companies, like AT&T Inc. T, Amazon.com, Inc. AMZN, Facebook Inc FB and Alphabet Inc GOOGL.

Meanwhile, Netflix announced price increases for its most popular standard tiers. Although these price hikes have driven revenue significantly higher, they could be adversely impacting member acquisition and retention, Bonner noted.