Why Jefferies Says to Sell Netflix Now

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Netflix Inc. (NASDAQ: NFLX) is one of the top players when it comes to the convergence of media. It is a true disruptor, and it has made many investors a fortune since its initial public offering in 2002. Even with a deal in which Comcast Corp. (NASDAQ: CMCSA) will add Netflix service availability throughout its own set-top cable boxes, Jefferies is basically telling investors to sell Netflix shares.

John Janedis, the analyst at Jefferies behind the call, has issued an Underperform rating. That is the same as a Sell rating at other firms. The firm’s old $120 price target is now set at $80, based on a sum of the parts analysis. Janedis said:

Although Netflix’s runway will span multiple years, our research suggests the domestic subscriber growth trajectory may be somewhat flatter than the market’s current expectations. While International will remain strong, we think the slowing U.S. market will pressure the stock’s multiple.

Other issues were brought up. One is that Netflix’s first mover advantage is eroding. It did build a massive subscriber base and content library with minimal competition, but Janedis thinks the environment will be much more competitive over the next five or so years. Another issue is that the subscription video on demand (SVoD) landscape is still in transition, where U.S. content owners are becoming more selective in licensing content to Netflix.

The key issue for this Underperform rating is that U.S. subscriber growth is slowing. With the company’s own long-term target of 60 million to 90 million subscribers (versus 47.9 million expected in 2016), the low-end of the range implies a home penetration rate of 52%.

Jefferies also sees Netflix’s international opportunity being large, but that growth is likely not expected to be linear. International growth in non-English speaking and emerging markets may be more challenging than expected in the near term. Limited amounts of local content and language barriers also will meet expensive price points in certain markets. Other issues there are very underdeveloped payment processing systems and a lack of broadband infrastructure.

Netflix’s $80 price target was based on a sum of the parts analysis. It reflects a discounted 2020 contribution profit estimate for each segment and a cash flow valuation.

Jefferies issued the following fiscal year 2016 estimates: revenue, EBITDA (earnings before interest, taxes, depreciation and amortization) and earnings per share (EPS) are $8,713 million, $519 million and $0.24, respectively. Its fiscal 2017 revenue, EBITDA and EPS estimates are $10,849 million, $984 million and $0.90, respectively. Thomson First Call has estimates of $0.27 EPS and $8.72 billion in revenues for 2016, as well as $1.03 EPS and $10.93 billion in revenues for 2017.

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This $80 price target is both under current expectations and under the existing share price. Thomson First Call has a consensus analyst price target of $117.22, with a low target of $45 and a high target of $150.

Netflix closed at $97.91 on Tuesday and traded down almost 4% at $94.20 early on Wednesday. It has a 52-week trading range of $79.95 to $133.27.