Once a pandemic favorite, Netflix (NASDAQ:NFLX) stock now represents a laggard. But CFRA analyst Kenneth Leon just added to the woes, downgrading NFLX stock from “hold” to a “sell” rating. Following a significant rise from this year’s July lows, Leon believes the streaming giant will lag the S&P 500. The analyst also believes the company’s new ad-tier subscription initiative will not accrue benefits until 2023.
According to Barron’s, Leon projects pain for NFLX stock in the second half of 2022. Specifically, the analyst says earnings per share (EPS) and EBITDA (earnings before interest, taxes, depreciation and amortization) will come in lower in the second half versus the first.
In a research note, Leon mentioned that the key catalyst for NFLX stock — the company’s ad-pay subscription plans — might not be visible until 2023. According to FactSet, among 46 covering analysts, only 28% rate NFLX as a buy. On the other hand, 57% of the analysts rate shares as a hold and 15% issue sell warnings.
Fundamentally, the negativity toward Netflix shares represents a nuanced (if not ironic) take on the cord-cutting phenomenon. Although Netflix originally contributed to consumers cancelling their traditional TV subscriptions, it’s now facing pressure from new rivals.
Competitors Target NFLX Stock
Several days ago, market participants eagerly awaited the fiscal third-quarter results for entertainment king Disney (NYSE:DIS). While the Magic Kingdom offered many implications for the consumer economy — particularly with its theme parks — all eyes were focused on the streaming component. Disney did not disappoint.
In Q3, Disney had 221.1 million total worldwide subscriptions across its streaming services. In addition to Disney+, the company owns Disney+ Hotstar, ESPN+ and Hulu. As Variety reports, Disney now commands “more total streaming subscriptions than Netflix.” Over the trailing month, NFLX stock is also up a modest 3% compared to Disney’s 13%.
Disney has weighed in on the ad-tier business as well. According to Polygon, starting Dec. 8 this year, “a version of the Disney streaming service will be available with ads for $7.99 a month.” Notably, the other ad-free subscriptions will rise in price, presenting a complex profile for consumers.
Per another Variety article, Morgan Stanley estimates that Netflix will charge $10 a month in the U.S. for the ad-based plan. While this could generate $7 a month for every sub in ad revenue, Netflix also arrives late to the party. Variety also notes that HBO Max, Hulu, Peacock and others provide “lower-cost options with ads.”
Why It Matters
Ads aside, the fact Leon downgraded NFLX to “sell” is enough of a significant development. According to the Wall Street Journal, analysts generally try to avoid overtly pessimistic views for diplomatic reasons. Economic incentives exist to keep ratings at least neutral, too. Per WSJ:
“[A]s much as one-third of analysts’ yearly pay can be tied to corporate access, says James Valentine, the founder of training and consulting firm AnalystSolutions LLC. Analysts generally earn in the six figures a year, but pay ranges widely by experience and securities firm.”
If anything, this adds even more weight to the downgrade for NFLX stock.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.