This Notable Analyst Believes Investors Are Overlooking Netflix's Cash Burn, 'Modest' Net Income

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  • Shares of Netflix, Inc. NFLX were trading lower by more than four percent Thursday morning after traders and investors fully processed the company's third quarter print.
  • Michael Pachter of Wedbush, one of the Street's most bearish Netflix-analyst, maintained an Underperform rating and $40 price target on the stock.
  • Pachter noted that management's commentary in defense of its print can be characterized by: "the dog ate my homework and other excuses."
Shares of Netflix were trading lower by more than four percent Thursday morning after partially recovering from an initial 14 percent plunge after the company reported its
third quarter results
Wednesday afternoon. Michael Pachter, an analyst at Wedbush, is one of the Street's most bearish analysts that covers Netflix. He found plenty of reasons within the company's print to justify a reiteration of an Underperform rating and $40 price target. Netflix reported revenue of $1.738 billion which fell short of Pachter's $1.767 billion estimate. The company noted that it's revenue fell short of expectations due to "involuntary churn" as many subscribers failed to update their credit card details in the quarter after they received a new chip-based card. However, the analyst suggested that this may be a "the dog at my homework" scenario and argued it is "far more plausible" that a combination of price increase and saturation was responsible for the churn. Pachter continued that investors "continue to overlook" Netflix's increasing cash burn of $(252) million and "relatively modest" net income of $29 million. These figures make Netflix's $40 billion enterprise value "difficult to reconcile" on earnings multiple or cash flow multiple basis – especially when considering the company expects to continue burning cash for the next few quarters and may need to raise capital in 2016. "Investors appear to value Netflix by taking the leap of faith that once it reaches a much larger size, the company can raise price without losing many subscribers (we agree) and its price increase will drop largely to the bottom line (we disagree)," Pachter wrote. "Investors appear to believe that international subscribers will be as valuable as domestic subscribers (we disagree), and that aggregate international growth will generate consistent profitability, without regard to differing tax, regulatory and cultural environments (we disagree)." Bottom line, Pachter argued that Netflix's valuation is "unwarranted" given the ongoing potential for slowing domestic growth and decreasing international profitability. His $40 price target is based on a sum-of-the-parts analysts that values the domestic streaming segment at $30 per share, the international streaming segment at $8 per share, and the domestic DVD segment at $2 per share.
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Posted In: Analyst ColorAnalyst RatingsMichael PachterNetflixNetflix InternationalNetflix SubscribersWedbush
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