The new NFLX price target still represents more than 50% downside from current prices around $325, so this is still an extremely bearish call — just not as extreme as before.
Like other analysts, Wedbush is skeptical of Netflix stock valuations long-term, but believes the upcoming earnings announcement will be a positive one. The new NFLX price target reflects those long-term concerns.
From Wedbush Securities:
“We are grudgingly raising our Netflix (ticker: NFLX) price target as we believe a peer multiple is unwarranted given potential for slowing domestic growth coupled with increasing content costs. Our revised price target reflects a sum-of-the-parts method that values domestic streaming at $112 per share, up from $56 to reflect an expanding Internet multiple. Our 40 times earnings-per-share multiple for domestic streaming is a discount to Facebook’s (FB) valuation. We are raising our international valuation to $11 per share from $7, but keeping domestic DVD valuation at $17 per share.
Netflix will report third-quarter results after market close on Monday, Oct. 21. We expect results to exceed expectations. We have modeled revenue of $1.10 billion and EPS of 55 cents, versus consensus estimates of $1.10 billion and 49 cents, respectively, and EPS guidance of 30 cents-56 cents (there was no revenue guidance). We expect third-quarter domestic streaming net subscriber adds above the midpoint of guidance for 690,000-1.49 million and our estimate of 1.00 million due to a stronger-than-expected positive response to Orange Is the New Black. Despite an uptick in marketing at the end of the third quarter, cost control should allow EPS above the high-end of guidance.”
Prior to its $80 target, Wedbush actually had a $65 target put in place in July. Wedbush analyst Michael Pachter expressed his conviction in the bearish call, saying, “I always am too early. I’ve been way early on this one. I’m convinced I’m right.”
Long-term risks for Netflix include the price sensitivity of domestic subscribers, and the high cost of both contract deals and original content. Pachter has previously expressed concerns that the NFLX library could grow stale because “they’re building something that’s going to amortize really quickly, and it amortizes by turning into negative earnings pressure.”
Wedbush Securities is one of six analysts with a bearish rating on NFLX. Seven rate it a “buy,” while 23 have a “hold” rating. The consensus NFLX price target is $250.33.
As of this writing, Carla Lake did not hold a position in any of the aforementioned securities.