Vtrade proposes to SELL Netflix @ USD367

Netflix Inc.

NASDAQ: NFLX

COMPANY DESCRIPTION

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. It operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. The company offers TV shows and movies, including original series, documentaries, and feature films. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. As of January 22, 2018, it had approximately 117 million members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California.

RECOMMENDATION

We rate Netflix Inc a SELL at a price of USD367.

Below are the basic reasons to recommend this stock as a Sell:

·       Netflix is facing stiff competition from Amazon Prime, Hulu, YouTube and HBO. Given the scope for growth in the market, all the players are ramping up their efforts to boost their subscriber base. Most of the players are investing heavily to develop original content that has become a differentiator for attracting new subscribers. Post Time Warner’s acquisition, AT&T has shown interest in escalating spending on HBO for content acquisition. Closing in on Netflix’s success is Amazon’s Prime, which offers a range of non-streaming benefits to its customers. Competition is heating up further with players like Facebook, Snapchat and Twitter also making efforts to improve video viewing on their platform. Moreover, Apple is also gearing up its original content portfolio. Disney is also set to enter the streaming market in 2019 and its pending acquisition of Twenty-First Century Fox is expected to be a major growth catalyst.

·       International expansion and content additions resulted in cost escalations in the form of technology investments and marketing expenses. However, the recent expansions will further dent the company’s profitability in the near term. Moreover, it is also expecting a significant amount of debt, which should add to interest expense. Also, it is likely to spend another $2 billion on marketing its content in 2018. The company plans to spend around $8 billion (rumored to be $12-$13 billion) on content this year. We believe that Netflix’s ability to effectively manage costs will dictate its prospects.

·       Moreover, Netflix’s failure to break into China is a concern. China’s demographic strength presents significant growth opportunity. Unfortunately, stringent regulations have proved an impediment so far.

·       Netflix’s popularity primarily depends on its ability to deliver new and updated content. This is a major challenge for the company as it continues to face cost escalation from higher license and renewal fees. This will weigh on the company’s balance sheet. Additionally, the company’s increase in subscription charges might lead to a backlash on subscriber growth going forward.

·       Cash flow burn is here to stay. The company said it expects free cash flow to be negative for years to come as it diverts more capital into producing content. Netflix reported free cash outflow of $2.019 billion in fiscal 2017. Moreover, management reaffirmed its earlier guidance for total cash flow burn for the current year in the range of $3–$4 billion. Although the fresh content will help in driving rapid subscriber growth, the increase in free cash outflow does not augur well for investors.

·       The company’s deal with luxury theater, iPic Entertainment, to release its movies in theaters at the same time as they are released online but expansion and content additions resulted in cost escalations, which along with stiff competition can thwart growth prospects.

·       Netflix added 5.2 million subscribers, much less than the expected 6.2 million in the quarter. Paid net additions were 5.5 million better than 4.7 million in the year-ago quarter but less than management’s expectation of 6.1 million.

LAST EARNINGS

Netflix  reported second-quarter 2018 earnings of 85 cents per share that beat the Consensus Estimate by a nickel. The figure was much better than 15 cents reported in the year-ago quarter.

The results included $85 million of non-cash unrealised gain from foreign exchange remeasurement on the company’s Eurobond.

Revenues of $3.91 billion lagged the consensus estimate of $3.94 billion.

Disclaimer:

Views are strictly personal. This Interim Financial Results & News posts or updates includes forecasts, projections and other predictive statements that represent Vtrade's assumptions and expectations in light of currently available information. These forecasts, etc., are based on industry trends, circumstances involving companies and other factors, and they involve risks, variables and uncertainties. The Group’s actual performance results may differ from those projected in these Interim Financial Results. Consequently, no guarantee is presented or implied as to the accuracy of specific forecasts, projections or predictive statements contained herein.