Should You Go Against the Grain and Sell Netflix Stock? (NFLX)

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Shares in Netflix, Inc. (NASDAQ:NFLX) popped as much as 20% Tuesday after the streaming media company clobbered earnings and profitability estimates, but at least one analyst still isn’t buying it.

Netflix, Inc. (NFLX) Stock Is Soaring, But One Analyst Says SellIndeed, Carlos Kirjner of Bernstein Research calls NFLX stock a sell.

Rating Netflix stock at “underperform” shows Kirjner is about as contrarian as you can get on the name, but he does have his points. And with a price target of $62 a share — or implied downside of nearly 50% — it’s wise to at least hear the guy out.

The proximate cause for Netflix’s rally was that subscriber growth was much better than expected in the most recent quarter. Although revenue was only in line with Wall Street estimates, profitability delivered an upside surprise. As Kirjner wrote in a note to clients:

“Domestic net additions were somewhat ahead of consensus estimates, both for reported 3Q16 (0.37 million net adds versus consensus of 0.31 million) and for 4Q16 management guidance (1.45 million versus 1.27 million pre-quarter consensus). International net adds were significantly ahead of expectations, both for reported 3Q16 (3.20 million net adds versus 2.01million) and in 4Q16 guidance (3.75 million versus 3.32 million pre-quarter consensus).”

Sounds great — until you look more closely, the analyst contends. Kirjner notes that on a year-over-year basis, NFLX domestic net subscriber additions declined 58% in the third quarter.

More troubling, that comes despite a 45% year-over-year increase in the company’s domestic marketing budget.

NFLX Stock Struggles on the Home Front

As a result, the bottom line for Kirjner comes to this:

“We point to the continued YoY decline in domestic net adds, despite a significant increase in marketing spend, the increase in churn associated with the price increase, the growing competition, which we believe will intensify, and the shrinking addressable market in the US, where the number of fixed broadband connections is likely declining.”

It’s a gutsy call on a stock that’s up nearly 40% in roughly in the last three months. And it certainly goes against the consensus on the Street, where 22 analysts out of 43 covering the stock call NFLX a buy and 13 rate it at hold. But that doesn’t mean Kirjner’s concerns can be dismissed out of hand.

Domestic subscriber growth is indeed a serious headwind. It’s very much possible that the market is underestimating the implications of the decline.

NFLX still looks like a buy, but don’t be surprised if it takes a dive sometime in the next year.

Hey, it’s not like Netflix stock has never crashed before.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/netflix-inc-nflx-stock-analyst/.

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