Netflix Inc. NFLX received a notable downgrade on Monday on expectations for lower cash returns.
The Analyst
Wells Fargo's Steven Cahall downgraded Netflix from Market Perform to Underperform, lowering the target price from $308 to $265.
The Thesis
Netflix had a good piece of the streaming service business to itself for a long time, but that's changing with multiple competitors having entered the market and more coming.
Cahall said Wells Fargo isn't particularly worried about Netflix's ongoing ability to sign up subscribers, with estimates of 2020 streaming subscribers of 194 million, 1% above the Street consensus and 2021 subscribers of 220 million, also above the Street.
It's how much it may cost Netflix to get those viewers that has the analyst turning bearish.
"We think NFLX can achieve the street’s subscriber growth expectations but those subs will be more expensive than investors realize," Cahall wrote in a note.
The new competition plays in here, forcing Netflix to spend more on content and marketing, which Cahall said, "brings the cash returns of the business into debate.
"If content is king, then cash is queen," Cahall said.
Price Action
Netflix's stock was down 0.86% to $307.50 per share at time of publication.
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