"Crouching Tiger, Hidden Challenges" - Macquarie Downgrades NFLX To Sell With $85 Price Target

Tyler Durden's picture

A YTD chart of the FANG stocks shows one name sticking out like a sore thumb: Netflix, which at $99, is well below where it was trading at the start of the year, and substantially underperforming its FAG peers. Unfortunately for shareholders of the video streaming company, there is more pain in stock today because overnight Macquarie released a report titled "Crouching Tiger, Hidden Challenges", in which it downgraded the stock to an Underperform with a $85 price target.

Here is the justification:



We are downgrading NFLX shares from Neutral to Underperform. We believe Netflix will succeed over time in its global expansion but the near-term may not be easy, with high content costs, increasing competition from  Amazon in the US, and competitive markets in many countries that Netflix has launched into this year. Our views are shaped by contributions from Macquarie global TMT analysts that contributed to our accompanying report out today, “Global SVOD – Netflix, Amazon & the rise of the locals”.




International expansion isn’t easy. Many countries Netflix is expanding into have been growing pay TV markets with incumbent operators that have invested in VOD/SVOD offerings, often as add-ons to existing subscriptions. In addition, numerous SVOD services have gotten off the ground, often at cheaper prices and offering more local content. Many of Macquarie’s global TMT analysts are sceptical of Netflix’s initial launch efforts, citing price and lack of compelling content as risks. We have factored these views into our international subscriber model, where we estimate below-consensus 73m subs by 2019. We believe success will require partnering with local content providers and/or investing in more local content, or in content that will travel. This will be expensive – indeed, Netflix’s total content obligations have ballooned to $16-18bn including  “unknown” off-balance sheet commitments, and could well rise further. We have developed a model that we’ve accurately employed before to forecast Netflix’s 3-year P&L content costs, which we work into our assumptions, leading us to cut EPS estimates in 2017, 2018 and 2019.


US growth could also be tougher in the near term, with more competition from Amazon, which is doubling its content spending this year, and a plethora of OTT options coming to market, from HBO Now to skinny bundles to virtual MVPDs like Hulu Plus. These will all compete for producers’ content and consumers’ time. 


Longer term however we think SVOD is rising inexorably and there’s little doubt Netflix will do well, with deep pockets, top-notch data to inform on viewership, and a pricing lever, having now raised ASP and delivered good revenue improvement – up 28% in Q2.


Earnings and target price revision


We are reducing 2017E EPS from $0.85 to $0.74.


Price catalyst


12-month price target: US$85.00 based on a DCF methodology.

Catalyst: Programming or subscriber updates, Q3 results in Oct.


Action and recommendation


Downgrade to Underperform. We expect investors will remain focused on raw sub numbers, which could disappoint near-term from both international sub adds  and price elasticity on demand in the US. These effects could  increasingly stand out in light of the high content costs.

Full report

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King Tut's picture
King Tut (not verified) Sep 13, 2016 8:38 AM

This POS should trade in the $5-10 range

Stainless Steel Rat's picture
Stainless Steel Rat (not verified) King Tut Sep 13, 2016 8:39 AM

Their software is starting to show glitches.

dark pools of soros's picture

Another Amazon boot licking analyst

SomethingSomethingDarkSide's picture

Solid service, everything is overpriced.  Obviously the author of this report did not include 'front running central banks' as one of their reasons to stay in the stock.  What are they thinking, relying on hard data?  Fools!

Huh Reeeally's picture

The first-to-market advantage is wearing off, competition is pouring in. I've seen a wireless box that streams all live sports, tv, movies, everything, and is also a PVR, or you can connect an external HDD to it for recording, for $20/mo, programming that netflix can't deliver, and at prices that cable providers won't deliver.

ParkAveFlasher's picture

Customer service is the deal-breaker.  Netflix is seamless.  As long as you have a device, you go from paying to using in minutes, with the same reliability as browsing.  Why bother with recording?  You can watch whenever, wherever.

Stormtrooper's picture

Do you have to own a television to use Netflix service?  I threw mine in the trash 20 years ago and haven't missed it once.  Too many nice parks, lakes and other meaningful things to do in the area.

dark pools of soros's picture

you can get Netflix on just about anything with a screen

E.F. Mutton's picture

Isn't it amazing how much better life is without a daily 4-6 hour dose of consumerism and propaganda shoved down your throat?

Any time I visit my sister and her family, most of them are staring blankly at the TV with their mouths half-open.  Or they are on FB or XBox.  It's creepy.

Honest Sam's picture

Lakes and parks??? The danger of ticks, flies, boring bugs, snakes, mosquitoes, and other voracious maneaters and bloodsuckers rival Wall Street. 

None off those can get at me in my Man Cave, surrounded by my dog, a refrigerator, vape machine and bong. 

0hedgehog's picture

Maybe part of the reason is they don't allow all movie titles to be viewed for the base monthly price, you pay an additional fee for certain titles. That's like going for a burger and they hand you the bun and tell you it's extra for the beef! When you squeeze your customers, they don't like it.

Huh Reeeally's picture

LOL, my wife had her hair done at Las Vegas Mirage once, it was $100+ for the cut, then they asked if she wanted it blow dried for another $60! Still, it was the nicest her hair has ever looked :-)

aliens is here's picture

3 years ago I tried Netflix for a month and cancelled within 2 weeks. All it has is old movies n boring shows. All I have now is TV and a DVD player. No cable no rabbit ears. Life is good without watching trash.

Honest Sam's picture


If you haven't seen "Dreamland" on NFLX, you are missing one of the funniest series to ever see a green light.  

It might just be me, but I'm a hard one to get a laugh out of, and this show puts me in stitches. 

NFLX is far better than you have rated it. 

I agree many of its movies and other shows are boring but on balance I'd not want to cancel it. House of Cards is fabulous. These gems are unavailable anywhere else. 

brooklinite8's picture

India is overpopulated and watch more movies than any one else. Why is netflix so focused on china when India is the big fish in the movie industry. Disney already has made key acquisitions and banking introducing kid friendly movies with cartoons. NFLX some how has to crack India. 

firstdivision's picture

Because many working class in India are paid too little to afford the service, while in China, wages have risen.  Which also is the reason China is now outsourcing to other cheaper labor countries.

Boca's picture

EPS of .32, trading today at 300x earnings, my target is 9.60 a share


JustPastPeacefield's picture

"and substantially underperforming its FAG peers."


I can't speak for everybody, but I really hate it when I underperform my fag peers. Grindr helps a lot though. 

U4 eee aaa's picture

Netflix does not have a great health prognosis. If it were running for president I'd call it Hillary and all its competitors Trump. They seem to think they are more skilled at making content than buying it. The problem is they also have a social agenda to push and that is turning off their customers. This is strongly evidenced by the fact that very few of their original programming goes past the first season. The ones that are popular don't seem to be getting second season support but that's OK, you need to tell the audience what to like, not the other way around.

Netflix still thinks it is the only serious game in town but within a few years they are going to have competition from everyone and his mom because, as Uncle Warren the scumbag would say, "The barrier to entry is way too low."

Underperform is generous