Netflix a Sell

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David Evanson and Jeff Rath

Forbes.com, Fall, 2011

Citing that the positive industry trends were outweighed by numerous company-specific issues with Netflix (NFLX), Canaccord Genuity technology analyst Jeff Rath re-initiated the company into his coverage universe with a SELL rating and $60 price target. Mr. Rath said:

“While the macro environment appears positive for NFLX, we believe that the company faces numerous challenges, including accelerating subscriber losses, rising content costs, an increased competitive landscape and the possibility of having to raise capital.”

He added, “Near term competition from both DISH Network Corp (DISH) and Amazon.com (AMZN) is legitimate, as both companies have a higher lifetime value of subscribers versus NFLX from which to subsidize their market entrance.”

He went on to say that, “On the content front, there is increasing evidence building that NFLX might not be as accretive to US premium video content owners as originally thought. While Netflix believes it better monetizes ‘back catalogue TV and movies’ and is thereby a net ‘benefit’ to content owners, there is some evidence that this might be changing. Despite recent DVD subscriber losses, we still forecast approximately 31% of NFLX revenues (and 70% of gross profit dollars in Q4/11) will be generated from DVD subscribers [distributed via mail]. As NFLX’s focus now shifts to streaming, its DVD purchases are declining rapidly, and in its wake the economic benefits of the physical DVD rental market have collapsed (once estimated at $6B in annual revenue). While NFLX is clearly spending more on streaming content, this spend is on much older content versus its DVD purchases.”