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UBS Downgrades Netflix: 'Hitting Pause On Binge Buying'

UBS Downgrades Netflix: 'Hitting Pause On Binge Buying'
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Netflix, Inc. (NASDAQ: NFLX) shares might finally be getting too rich for Wall Street, trading up 118 percent year-to-date as of Wednesday’s close. The high valuation led UBS to issue a downgrade on the stock.

The Analyst

UBS analyst Eric Sheridan downgraded Netflix from Buy to Neutral while raising his 12-month price target from $375 to $425.

The Thesis

Sheridan’s new rating reflects Netflix’s gain this year, and projects paying a 40 times GAAP EBITDA in fiscal 2022. The analyst doesn't see significant upside ahead for second-quarter earnings — to be announced July 16 after the close — compared to previous quarters.

Also on the bearish side of the equation is evidence from Google search trend analysis that sequel seasons for many of Netflix’s core series are underperforming previous seasons.

That said, the company does have a strong slate of titles announces for Q3 and UBS’ U.S. credit & debit card spend tracker suggests stability in subscriptions.

Also positive, Sheridan sees “little in the way of any risks” from competition, free cash flow burn or dependence on capital markets for content spending.

A persistent talking point among Netflix bears, though, has been that “bad news” isn't needed to send the stock plummeting from its high valuation, just slight underperformance in subscription growth.

Price Action

Netflix shares were trading down about 1.4 percent to $412.68 at time of publication.

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