Deutsche Bank Hits Sell Button On Netflix Stock; Expectations Too High
Internet television network Netflix (NFLX) saw its shares fall on Monday after the company got a bearish report from Deutsche Bank.
Deutsche analyst Bryan Kraft initiated coverage on Netflix with a sell rating and a price target of 90, more than 10% below its current price.
Netflix stock was down nearly 1%, near 104, in midday trading on the stock market today.
Kraft sees as an unfavorable risk-reward profile for Netflix after the recent run-up in its share price. Much of that appreciation was based on rumors that Netflix might be an acquisition target for Apple (AAPL), Walt Disney (DIS) or another company. But Kraft said he is skeptical that Netflix will be acquired.
"Netflix's business is too fully formed/valued to be acquired by Disney or Apple," Kraft said in a research report. "Lack of a compelling strategic rationale and severe economic/earnings dilution are major obstacles to a potential combination."
The investment firm also says the market is setting expectations too high for the next four years.
IBD'S TAKE: Netflix stock has a middle-of-the-pack IBD Composite Rating of 50. It ranks No. 12 out of 19 stocks in IBD's Leisure-Movies & Related industry group. Meanwhile, rival Amazon.com is benefiting from multiple growth engines in e-commerce, cloud computing infrastructure and streaming video. Amazon is on IBD's Leaderboard list of superior stocks.
Kraft said he is upbeat on Netflix's business, but cautious on its stock.
"Netflix has a long runway for growth due to its first mover advantage and self-reinforcing (business) model," Kraft said. "Increasing content and user experience investment drives subscriber growth and pricing power, which funds further content and user experience investment."
Deutsche forecasts 200 million Netflix subscribers in 2026, vs. 83 million today. It also predicts $27 billion in revenue in 2026, vs. $9 billion now, and $8 billion in earnings before interest and taxes, vs. $200 million today.
That forecast puts Netflix at the same size, based on EBIT, as Time Warner (TWX) is today, Kraft said.
"Netflix has become the must-have (subscription video-on-demand) service in the U.S.," Kraft said. "It is a complement to pay TV for the vast majority of users, and internationally it has had success in markets where local TV incumbents have failed."
In the U.S., Netflix's biggest competitive threat is Amazon.com (AMZN), which continues to improve its Amazon Prime streaming video service with original and licensed content, Kraft said.