What the Netflix Downgrade Means For Mutual Fund Investors (NFLX)

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What the Netflix Downgrade Means For Mutual Fund Investors (NFLX)

Shauna O'Brien Mar 16, 2015

Inside the Downgrade

According to analyst Ken Sena: “We are downgrading Netflix to a SELL rating from HOLD and reducing our target price to $380 from $450 on what we perceive to be an intensifying competitive environment necessitating increased investment with uncertain return. While our 2015 subscriber growth estimates fall modestly by 2% (70.1mm, +22% y/y), we are reducing our consolidated operating income by 26% to $381m (-5% y/y), or 6% of revenues, from $517mm previously, as we no longer view management’s lower y/y op income guidance as conservative. In accordance, our free cash flow drops to negative $677mm for the year, compared to $97mm for Street (which we suspect is a result of a more conservative view of upfront cash commitment needed to fund its content strategy), which includes ~$1.5bn in cash content expense (net of $3.4bn in amortization), with 2016 FCF expected to see only modest improvement (-$393mm).”

Subscribers Are Growing, But So Are Expenses And Competition

With the availability to video streaming, consumers demand a wide selection of movies and TV shows, but Netflix is unable to offer it all. Netflix’s expenses have been growing as it adds more content for its subscribers. The company is now spending more on its content than BBC.

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The Bottom Line

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