2 Reasons Netflix Won't Enter The Sports Arena

Loop Capital Markets said in a note Thursday that Netflix, Inc. NFLX is unlikely to take a plunge into the sports rights arena. The firm based its deduction two reasons.

• Netflix may not want to put itself in the same position Time Warner Inc TWX and Walt Disney Co DIS found themselves in two years ago, of bidding for already existing rights at much higher prices.
• There isn't enough sports going around across the globe that can make each sport substitutable.

Premised on expectations that Netflix will transform into massive FCF producer by 2018 from a net cash user currently, and going by the subscriber growth assumptions, Loop Capital raised its price target for Netflix to $151 from $133, maintaining its Buy rating.

Netflix May Not Want to Dilute its Low Cost Appeal

Analyst David Miller noted that Time Warner and Disney combined coughed up $2.66 billion per year for rights to air select regular season and play-off games of the NBA throughout the season, up 186.1 percent from the previous deal. While noting that the burden due to the incremental rights fees will be passed on to consumers, the analyst said Netflix may not be willing to do anything to reduce its appeal as a smorgasbord of content for a very low monthly price.

Substitutions Hard to Find in Sports

Loop Capital noted that unlike in filmed entertainment content, where one action film or comedy series can be substituted for another action film or comedy series, one can't substitute baseball for football or soccer for cricket.

Raising Estimates

The firm raised its domestic streaming net subscriber estimate by the end of 2017 to 53.7 million or 9.6 percent growth from 53.6 million or 9.5 percent. The firm's international subscriber growth estimate now stands at 55.8 million or 29.7 percent growth, up from 54.8 million or 29.7 percent growth.

The firm also raised its 2017 core non-GAAP earnings per share estimate to $1.01 from $0.82 and its revenue estimate to $11.03 billion from $10.77 billion, assuming ASP of $8.64. The earnings estimate is above the current consensus estimate, the firm noted.