Axiom Initiates Netflix At Sell, Has Concerns Of Rising Content Costs

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Netflix, Inc. (NASDAQ: NFLX) could miss the consensus expectations for longer-term subscriber growth and profits due to intensifying competition, diminishing pricing power, and rising content costs. Axiom’s Victor Anthony initiated coverage of the company with a Sell rating and $80 price target.

The longer-term secular growth story for Internet TV remains intact, while Netflix would likely continue to play a leading role in “disrupting the linear-TV experience.”

The company has a collection of high-quality original content and its range of TV shows and movies should continue to appeal to consumers of video content. Anthony added, however, that Netflix’s ability to meet the longer-term subscriber growth and profit estimates may come under pressure.

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Dealing With Competition, Increased Content Needs

Despite rising competition, Netflix has been able to double its domestic subscriber base from the 2011 levels. However, domestic subscriber growth has decelerated off late, partly due to competition.

“Netflix is now seeing heightened competition for both subscribers and content licensing primarily from Amazon, Hulu, and HBO, and several other online streaming services launched in the U.S. and internationally over the past two years, with several more to come,” the analyst wrote.

Netflix could face increased churn in the back half of 2016 due to recent price hikes. Moreover, the company faces tougher comps in 2H16 and 1H17, after having launched its services in more than 100 countries in 1Q16.

Another aspect of these launches is that those markets would demand local content, forcing Netflix to either spend more on licensing or developing original content, which would exert pressure on its international profitability goals, or spend less, and risk losing subscribers.

“Investors are paying a super-rich multiple that, in our minds, calls for near flawless execution, an expectation we believe will be hard to achieve,” Anthony commented.

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