By Karen Schwartz
Netflix (NFLX), long loved by investors who watched it rise, crushing Blockbuster (OTC:BLOAQ) and boasting a 20 million strong subscriber base even with Hulu and other companies at its heels, is posing a dilemma for analysts.
The company’s stock price almost tripled in the last year, forcing analysts to boost their price targets dramatically, even while some of them question the company’s longer term prospects. The stock has pulled back from a high of $247.55 on Feb 14, to close today at $203.37, after Amazon (AMZN) announced its own streaming service last week. Analysts are divided on the impact the move, but Amazon has served notice on Netflix of its intent to take market share.
The median price based on the the 12 most recent targets tracked by Alacra Pulse is $225, up from $155 in our December prognosis and 10% above Thursday’s closing price of $203.37. The mean target has risen to $215.70 from $152.06. Out of the 12 analysts, five have a positive rating, five are neutral and two are negative.
Current 12-month price targets of selected sell-side and independent analysts. Click image to enlarge.
Standard & Poor’s Michael Souers on Feb 23, cut his rating on Netflix stock to Sell following Amazon’s announcement. Less than a month earlier, Souers had upgraded the company from Sell to Hold on January 27, boosting his price target to $220 from $140. Now he’s cut it back to $160.
In January he wrote that “While likely higher content costs and an intense competitive landscape in digital streaming are concerns to us, NFLX is planning significant expansion into international markets over the next two years, with large potential for additional growth.”
Now he says that “With our view of evolving trends in the home entertainment industry, we see a risk that NFLX’s DVD subscription business could eventually face obsolescence.”
Souers is among several analysts who see the company’s position in the space as at risk.
Needham’s Charlie Wolf cut the stock’s rating to Underperform, and has no price target. Wolf noted that “The service for Amazon Prime members is cheaper than Netflix’s even before free shipping is thrown in. Amazon’s new service could cut meaningfully into Netflix’s growth trajectory.”
Also negative is Michael Pachter at Wedbush Securiities who is sticking with the $78 price target he has held since last August. He has rated Netflix Underperform since November 2009.
Jefferies’ Youssef Squali points out that Netflix’s “first mover advantage” and “deeper library” don’t mean Amazon’s move won’t impact the company. “Given AMZN’s brand, user base, technology platform and lower price, it’s likely to disrupt NFLX’ sub growth over the next several qtrs.” Squali reiterated a Hold rating whle raising his price target to $210 from $195.
William Blair’s Ralph Schackart agreed that Amazon is only getting started. “While Amazon’s initial video library is inferior to Netflix’s digital catalog, we believe Amazon’s library will continue to grow, especially considering its roughly $9 billion in cash.”
Still, Netflix has its supporters.
David Miller at Caris & Co boosted his price target to $316 from $224, writing that “Netflix remains in a competitive sweet spot with declining retail competition, new technologies, changing media consumption habits, and still-nascent competition online (even with today’s Amazon streaming announcement)…”
Close behind Merriman Capital’s Eric Wold, who asserts that it’s all about content. Given Netflix’s exclusive content agreements, he believes “that Netflix has a significant content advantage over Amazon or anyone else trying to enter the space.” He set a price target of $300.
Oppenheimer’s Jason Helfstein questioned Amazon’s streaming quality and alleged that its selection is “inferior” to Netflix’s. he has an Outperform rating and $230 target.
Piper Jaffray’s Michael Olson, who raised his target to $240 from $202, also noted the gap between Netflix’s 20,000 titles and Amazon’s 5,000 shows.
Bank of America Merrill Lynch’s more than doubled its target to $275 from $131. Analysts wrote that “we do not expect Amazon to sacrifice its core margins significantly in order to build a competitive library vs Netflix (and bid for exclusive content agreements.)”
Macquarie Capital’s Ben Schachter said Netflix still has a head start when it comes to movies, pointing out that only one of the 100 most popular movies on Netflix can be streamed free by Amazon service users. “The bottom line is that this offering from Amazon will not likely cause much of an exodus from Netflix in the beginning.”
Sources: Alacra Pulse: Sify, SchaeffersResearch.com, WSJ Blogs, 24/7 Wall St, Seattle Times, Forbes