Why Analysts Are Cooling Off on Netflix

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Netflix Inc. (NASDAQ: NFLX) quietly hiked prices earlier this week, and investors sent shares to all-time highs. On the surface this is reasonable, but as investors are heating up, analysts seem to be cooling off, with the consensus target lagging at $189.38. Jefferies was one of the first firms to tackle Netflix’s price hike and why it is on the sideline about this stock.

In terms of the price hike, the online streaming service recently announced that it will raise the price of its standard and premium plans by $1 and $2 per month, respectively.

Jefferies has a Hold rating for Netflix with a $180 price target, implying a downside of 7.4% from the most recent closing price of $194.39. The firm is assuming modest churn, and it expects this could drive a mid- to high-single-digit percentage impact to domestic revenue, while incremental programming investment could somewhat offset the benefit to overall profitability.

Based on the average selling price (ASP) that is currently slightly above $10, Jefferies estimates that 75% of domestic subscribers currently subscribe to the $9.99 plan, 15% subscribe to the $11.99 plan, while 10% subscribe to the $7.99 plan. Applying 90% (standard and premium, excluding basic) to an average domestic sub base of 54.9 million in 2018 (average of fiscal 2017/18 year end subs, assuming over 3.8 million net adds), the firm believes up to 49 million subscribers could be affected by the price increase.

In the report, Jefferies detailed:

Assuming no churn, we estimate that a $1 / $2 increase could drive $650-700M in incremental revenue in 2018. Assuming modest churn to the base of standard / premium subs, we est. the overall incremental rev. impact could be $510M (7% of 2018E US revenue). Upside could be driven by tier downgrades (vs. cancellations), and incremental sub growth related to promotions (i.e. T-Mobile). In terms of profitability, we expect the company will invest the majority of the incremental cash flow in programming, maintaining a focus on modest annual EBIT margin expansion (18E: 11%, from 7% in ’17).

Perhaps one of the most important highlights of the report, Jefferies is adjusting its U.S. net adds estimate +825K (from +750K), and the International net add estimate to +3.8 million (from 3.65 million), slightly ahead of guidance.

Shares of Netflix were last seen trading at $198.38, with a consensus analyst price target of $189.38 and a 52-week range of $97.63 to $195.74.