Market Overview

Netflix Needs A Lower-Cost Subscription Tier, Needham Says In Downgrade

Netflix Needs A Lower-Cost Subscription Tier, Needham Says In Downgrade

Walt Disney Co's (NYSE: DIS) Disney+ and Hulu, Apple Inc.'s (NASDAQ: AAPL) Apple+, CBS Corporation's (NASDAQ: VIAC) All Access and Comcast Corporation's (NASDAQ: CMCSA) Peacock are sure making life difficult for industry original Netflix Inc (NASDAQ: NFLX).

The Rating

Needham analyst Laura Martin downgraded Netflix to Underperform.

The Thesis

Netflix charges between $9 and $16 per month for its service compared to rival rates between $5 and $7. Martin expects Netflix to cede 4 million premium U.S. subscriptions in 2020 as viewers defect to more affordable alternatives.

“Since NFLX’s balance sheet cannot withstand larger cash losses (our view), we think that a new $5-$7/month pricing tier, subsidized with ads, is the best answer for NFLX,” the analyst wrote in a report.

Netflix isn’t likely to take Martin’s advice. Management has insistently rejected advertising. As a result, Martin expects a drop in subscriptions, which will weigh on the firm’s valuation both directly and indirectly.

Stock reactions to past earnings reports suggest a close correlation between valuation and subscription growth. Additionally, because U.S. subscriptions contribute three times more profit than international subscriptions, a decline in domestic metrics could cut free cash flow and push management to pursue more debt or public equity, which could pressure share price.

The subscription decline also messes with Netflix’s strategic spending. “NFLX customer acquisition costs escalate rapidly when NFLX tries to buy back lapsed subs, which takes capital away from content investment or adds to NFLX’s negative FCF gap,” Martin wrote.

Needham would become more constructive on Netflix around $260 per share.

Price Action

At time of publication, Netflix shares traded down 1.7% at $297.26.

Related Links:

Needham: Buy The Dip In Roku

Netflix Analyst Downgrades Stock, Says Streaming Service Lacks Operating Leverage

Latest Ratings for NFLX

Jan 2020CitigroupMaintainsNeutral
Jan 2020GuggenheimMaintainsBuy
Jan 2020OppenheimerMaintainsOutperform

View More Analyst Ratings for NFLX
View the Latest Analyst Ratings

Posted-In: Laura Martin NeedhamAnalyst Color Downgrades Top Stories Analyst Ratings Tech Best of Benzinga


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