Netflix shares were down more than 4% in mid-day trading Monday after Wall Street firm Evercore ISI downgraded the stock to “sell” based on growing competition from HBO, Amazon, Hulu and others in the over-the-top video segment.
Netflix’s growth trajectory will be stifled as OTT rivals continue to boost their offerings in the market and provide greater choice to consumers, the firm’s analysts wrote in a research note. Among developments Evercore cited: Next month’s HBO Now launch on Apple TV, which will make the premium cabler available for the first time without a pay-TV subscription; and Netflix is not in the running to acquire “Seinfeld” streaming rights from Sony Pictures Television (with Amazon and Hulu said to be among the bidders).
“In the context of increasing competition among existing and emerging distributors, and with content providers becoming better equipped to leverage these newer channels through OTT offerings of their own, we view (Netflix) shares as unattractive,” wrote the Evercore analysts, led by managing director of equity research Ken Sena.
Other developments the firm cited as potentially putting pressure on Netflix’s growth include ABC’s live-streaming of “The Oscars Backstage” on Facebook and Snapchat’s new Discover platform — even though those free video services are not directly competitive with subscription VOD.
Evercore cut Netflix to a “sell” rating from “hold” and reduced its target price on the stock from $450 to $380 per share. The heightened competitive landscape will necessitate “increased investment with uncertain return,” the analysts said. Netflix’s stock opened Monday at $430.83 per share before falling as low as $417.34; its 52-week high is $489.29 per share.
Netflix will still add subscribers at a rapid clip, the firm estimates — just not as fast as previously expected. Evercore reduced its projection for Netflix 2015 subscribers by 2%, to 70.1 million, which would be up 22% from 57.4 million worldwide at the end of last year.
But the firm also reduced projected consolidated operating income for the year by 26%, to $381 million (down 5% year over year from $517 million previously). “Although we note that this reduction is rather substantial, it is consistent with management’s guidance that they expect operating income to be lower in 2015 on an absolute basis than it was in 2014, which we had previously viewed to be conservative,” Evercore’s analysts wrote.
Netflix has pegged an aggressive schedule for rolling out internationally, targeting expansion to 200 markets worldwide by the end of 2016. But the company’s international strategy will face “certain impeding factors to scale,” including lighter TV consumption and lower pay-TV penetration outside the U.S., as well as greater SVOD competition in international markets.