tiprankstipranks
Netflix: The Story of Mounting Debt and Competition
Stock Analysis & Ideas

Netflix: The Story of Mounting Debt and Competition

Its incredible journey from small DVD-rental provider to streaming pioneer can be attributed to Netflix’s (NFLX) heavy investments in the production and distribution of localized content. However, intensifying competition from Apple+ (AAPL), Amazon Prime (AMZN), Disney+ (DIS), Paramount+ and Peacock is a major concern. Moreover, Netflix’s highly leveraged balance sheet (with long-term debt almost double the cash and cash equivalents) is a persistent headwind.

Recently, Needham analyst Laura Martin weighed in the positives and negatives of the Netflix business and maintained that the scale is heavier on the negative side. She reiterated a Sell rating on the stock and did not set a price target. (See Analysts’ Top Stocks on TipRanks)

“We believe that because Netflix does not offer a separate, lower-priced, ad-driven tier, like almost all its streaming competitors, this lowers its ROICs, shrinks its TAM, grows it customer acquisition costs, and aids its enemies,” argued Martin.

The analyst also believes that the subscription options that Netflix offers its consumers are much costlier than its counterparts, and to better compete with them, Netflix needs to introduce lower-priced options ($5-$7/month consumer fee for instance, in line with peers). This will also attract more subscribers to the Netflix platform.

Meanwhile, Martin also contends that any reduction of revenues stemming from lower subscription fees can lead to a collapse in the balance sheet. Therefore, to withstand the recommended $5-$7/month consumer fee, Martin believes that a supplementary 5-6 minute/hour advertisements can boost Netflix’s revenues.

Importantly, Netflix recorded lower consumer churn rates in the third quarter of 2021, compared with the prior-year quarter as well as pre-COVID-19 levels. Despite this, Martin is concerned that without a lower cost tier of subscription fee, the churn rate will eventually rise in the regions that bring the highest ARPU (average revenue per unit) as the economies reopen and cheaper options from other similar platforms increase.

The analyst consensus, nonetheless, is cautiously optimistic about Netflix, with a Moderate Buy rating based on 24 Buys, 5 Holds, and 3 Sells. The average Netflix price target of $679.13 indicates an upside potential of 8.64%.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles