The streaming-giant Netflix Inc (NASDAQ:NFLX) is starting 2020 with the analysts' community becoming increasingly divided over its fate. After pursuing a strong growth strategy over many years, the company is beginning to face competition it never encountered before. That seismic shift in the industry is prompting analysts to cut their growth forecasts and advise investors to stay on the sidelines.
This week, the stock was downgraded to a “sell” rating at Needham, which said that the video-streaming company was at risk of losing millions of U.S. customers in 2020 given rising competition, including from low-cost rivals. Earlier this month, Citi analysts downgraded the stock to a “neutral” saying the Street estimates on the stock are too high.
In the group of top five tech stocks that includes Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL), (NASDAQ:GOOG), Netflix has gained the least in 2019, rising just above 10% due to investors concerns about its future growth. Its shares were trading at $298.44 at yesterday's close.
These bearish calls came after a couple of tough quarters that Netflix reported for its subscriber growth. In October, it missed its subscriber-growth target for the second consecutive quarter, raising questions about the streaming-video giant’s ability to continue to produce double-digit growth when traditional media companies are coming up with their own streaming products.
In the normal scheme of things, these shortfalls probably wouldn’t have attracted that much negativity because the giant has consistently produced strong growth and beaten analysts’ expectations in the past.
But the major worry this time around is that the slowdown is coming at a time when two major competitors, Walt Disney (NYSE:DIS) and Apple (NASDAQ:AAPL), have entered the streaming-video market with a competitive pricing structure.
Netflix “must add a second, lower priced, service to compete with Disney+, Apple+, Hulu, CBS All Access and Peacock,” Needham analyst Laura Martin wrote to clients, predicting that the company could lose 4 million U.S. subscriber next year if the company doesn’t make changes.
Because the balance sheet “cannot withstand lower revenue,” Needham recommended the creation of a pricing tier that has a lower monthly cost, but which will be supported by advertising revenue.
More Spending on Content
Citi analyst Jason Bazinet said either Netflix needs to spend even more on content or subscriber estimates need to fall on Wall Street after the changing market conditions. And neither of those scenarios is good for the stock. If Netflix spends more content, it will hurt margins and cause the stock to drop by 15%, he calculates. Whereas a slowdown in subscriber additions may be the lesser of the two evils, causing a 5% pullback in the stock.
These threats definitely make Netflix a risky bet in 2020, but that doesn’t mean that the company has completely lost its fan base. In fact, there is a divergence of views between the analysts' community and what the company’s current stock price reflects.
“As Netflix’s content investments, distribution partnerships and marketing spend drive subscriber growth significantly above consensus expectations and the company approaches an inflection point in cash profitability, we continue to believe shares of NFLX will significantly outperform,” analysts at Goldman Sachs wrote in a recent note, assigning the 12-month price target of $420 a share.
The bearish rating is still a minority view on Netflix. There are seven firms with a sell-equivalent rating on the stock, according to data compiled by Bloomberg, compared with 29 buys and 10 hold ratings. The average price target is $353, which implies upside of about 19% from the stock’s current price.
Bottom Line
Netflix stock’s journey upward has largely been unhindered in the past decade. But with the increasing competition, rising costs, and saturation in the domestic market, it seems increasingly difficult for the streaming giant to repeat that performance. For these reasons, 2020 could very well be a make or break year for Netflix.