At one point, Netflix shares were forecast to be more than $500 per share. Now, a still-impressive $350 target price for the end of 2020 is being predicted by one big Wall Street watchman.
Investors were less than thrilled, sending the OTT giant’s stock down by more than 4% in midday trading.
As of 3:40pm Eastern, NFLX was off 4.78% to $253.20 on volume of 14.59 million; average volume is 7.54 million shares.
Triggering the sell-off for Netflix is a fresh report from Pivotal Research Group Entertainment/Interactive Subscription Services Analyst Jeffrey Wlodarczak.
In it, Wlodarczak notes that Pivotal is “substantially” reducing its year-end 2020 target price on Netflix from $515 to $350.
The $515 share price was seen as downright outlandish by some industry observers. However, the slash to $350 is also being viewed as an extreme adjustment, as many believed Netflix was a $400 stock — and would be nearing it by the start of 2020.
Why the sharp slice from Pivotal? Wlodarczak cites “materially higher than forecast market content cost inflation,” among other things.
What earned Emmy awards at the lightly watched ceremony televised on FOX Sunday evening also caught Pivotal’s attention. “Big Internet players appear to be ramping their spend significantly on advertising as highlighted by Sunday night’s Emmy [telecast] as they seem to believe we are entering the inflection point where OTT growth accelerates materially (mostly at the expense of traditional PayTV).”
Against this backdrop of accelerating industry spending, Pivotal believes the right move for Netflix management is to also materially accelerate their spend — potentially temporarily pressuring margins/free cash flow — to keep its sizeable content lead on its peers, increase the barriers to entry for new potential entrants, and reduce churn while maintaining ARPU and subscriber growth, Wlodarczak says.
“While we left our subscriber forecasts mostly unchanged, we raised our medium term cost forecasts ultimately assuming an annual cash outlay on programming of $35 billion in 2025, up from $30 billion previously,” he explains. “The changes drove the sizeable 30% reduction in our year-end 2020 target price.”
Also worrisome for Pivotal is a risk going into Q3 of another subscriber miss driven by competitive OTT products or an acceleration in content costs.
Ultimately, Netflix will be just fine — and a solid investment, Wlodarczak declares.
“We remain long term bulls on the Netflix story and still think they win the global OTT race and ultimately generate substantial profitability,” he says. “Our new forecasts imply they are going to respond to content cost acceleration by revving up their own content spend that will allow them to maintain their subscriber growth while pushing back profitability materially. In the end our view is that very few players can (or will) keep up with these spend levels and that ultimately this will be a two-horse race (Netflix and Disney) where both horses can win, with Amazon on the periphery … and there is a reasonable shot that AT&T will screw up HBO as a competitor.”
