Shares fall as much as 5% after Morgan Stanley downgrade citing challenges from Amazon, Hulu and HBO

Netflix shares fell as much as 5% Tuesday after a Wall Street analyst firm downgraded the stock — citing increased competition in the streaming-video category from Amazon, HBO and Hulu in the coming year as hurting Netflix’s growth trajectory.

Morgan Stanley’s team of Internet analysts, led by Scott Devitt, downgraded Netflix shares to “underweight” from “equal weight,” and lowered 12-month target on the share price from $333 to $310. Netflix shares fell as low as $340.83 following the downgrade, after closing at $359.57 on Monday.

“We expect competition in U.S. digital video streaming to grow tighter in 2014 as services like Amazon Prime Instant Video, HBO Go and Hulu Plus offer compelling alternatives to Netflix’s service and each could corner specific segments of the market,” the Morgan Stanley analysts wrote. “This could challenge Netflix’s gross subscriber growth and lead to higher U.S. marketing/content costs.”

Netflix’s share price quadrupled in 2013, rising from $92.01 on Jan. 2 to $368.17 per share on Dec. 31. Investors have been bullish about the company’s growth prospects and its expansion into exclusive and original content.

Amazon may be closest to nipping at Netflix’s heels. The e-retailer said last month that during the third week of December it signed up more than 1 million members for Amazon Prime, its free-shipping program that includes access to Internet video streaming. That now gives Amazon “tens of millions” of Prime members; the company had nearly 11 million as of June 2013, research firm Morningstar estimated.

With its rivals turning up the heat, Netflix could see its U.S. subscriber growth slow down in 2014. Morgan Stanley cut estimates on net adds for Netflix’s U.S. streaming service from 5.5 million to 5.2 million for this year, and from 3.5 million to 3.1 million for 2015, based on “intensifying domestic competition.” Morgan Stanley’s $310 per share target price represents 47 times 2015 earnings per share.

In addition, Netflix may not have as much room for growth as investors appear to believe, according to the MS analysts. “Even if Netflix’s churn levels fall to record lows, we estimate that over 48MM out of 92MM residential broadband households (~53%) would need to watch Netflix over the next 12 months to meet our 2014E domestic sub forecast of 39MM,” Swinburne and team wrote.

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