Arete Negative On Netflix: It's Time For The Hard Work

There are very few companies that launch products in 130 new markets at the same time. However, Netflix, Inc. NFLX did so in January.

While constructing a worldwide content production and distribution platform is a great way to create “a genuinely differentiated media business,” Netflix’s first quarter results just prove “how content costs will continue to rise to attain this goal, pushing further in the future the point when Netflix can demonstrate scale economies,” Arete analysts pointed out in a report. The firm downgraded its rating on the stock from Neutral to Negative, trimming the price target to $79.

Moreover, the company’s cautious approach to price increases in the U.S. had further undermined their conviction regarding its pricing power, especially as competition heats up.

Another source of concern was the slowdown in client growth in international markets, which was reflected in both first quarter results and second quarter guidance, the note stated.

“Cash content costs per streaming customer are still rising, further postponing the time when Netflix can demonstrate global economies of scale,” Arete analysts concluded, explaining the implications for the capital structure – the firm anticipated “net debt to peak a little under $2bn in ’18 with Netflix perhaps requiring $1.5bn in additional capital from high-yield markets.”

Shares closed at $87.74, down 2.5 percent.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.