Netflix (NFLX) stock could fall about 16% from its current price of $316, according to Wells Fargo analysts. The analysts downgraded Netflix’s stock rating to “underperform” from “market perform” on Monday, and cut its price target to $265 from $308. Their decision to downgrade Netflix stock and cut its price target was for several reasons.
Netflix stock downgrade: Might miss free cash flow estimate
Wells Fargo analysts think Netflix’s free cash flow generation might disappoint. They expect Netflix’s free cash flow for the next five years to fall short of Wall Street forecasts by as much as $18 billion.
Netflix’s content strategy will be more expensive than investors think
Disney+ and Apple TV+, launched this month, both aim to take customers from Netflix, the market leader. The services are trying to appeal to customers with prices significantly lower than Netflix’s. Wells Fargo expects their launch to impact Netflix stock.
As the streaming war intensifies, Wells Fargo foresees Netflix responding by investing more in content production and licenses. Netflix has signaled it would rely on the strength of its content to defend and grow its market share. In a letter to shareholders last month, Netflix stated, “While the new competitors have some great titles (especially catalog titles), none have the variety, diversity and quality of new original programming.” It added, “We expect we’ll continue to grow nicely given the strength of our service and the large market opportunity.”
But boosting content spending would drive up Netflix’s costs and crimp its free cash flow. Netflix’s content costs have been rising steadily as the company invests in original programming. Its content costs jumped to $12 billion in 2018 from $8.9 billion in 2017. They could top $15 billion this year and rise to $17.8 billion in 2020.
Interestingly, despite Netflix’s big content spending, some customers still feel its programming is dull. KilltheCableBill reports 42% of Netflix customers who ditched the service recently did so over lack of interesting content.
Netflix suffered outage before Wells Fargo downgrade
Netflix suffered a service outage that lasted several hours last Thursday. The company fixed the problem and offered an apology to affected customers but didn’t explain what caused the outage. About a week earlier, Disney+ suffered technical glitches on the day it launched. Walt Disney (DIS) blamed the glitches on exceedingly strong demand for the service.