Netflix Inc.’s growth forecasts for the next couple of years look risky, according to an analyst who’s hitting pause on the stock.
Wolfe Research’s Peter Supino downgraded shares of Netflix
NFLX,
to peer perform from outperform Friday, writing that he’s concerned about reports of slower-than-expected adoption of the company’s advertising-supported tier of service as well as signs that members might be trading down to lower-priced plans.
The stock was off 1.1% in morning trading Friday.
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Supino said that the two largest drivers of Netflix’s stock rise appear “increasingly risky” over the medium term. He wrote that he worries about the company’s future net-addition potential given that Netflix has eliminated its basic ad-free option and is likely to raise prices on other plans once the dust settles on the recent password-sharing crackdown.
“Despite a cheaper [ad-supported] tier, which should help mitigate churn, the elimination of the Basic without Ads tier is a counteracting headwind to volumes,” Supino wrote.
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He also said he is more cautious about the company’s operating leverage in light of commentary from Chief Financial Officer Spencer Neumann suggesting that it would be challenging for the company to keep growing margins by three percentage points every year.
“Though part of our revisions to EBITDA [earnings before interest, taxes, depreciation and amortization) account for increased licensing activity — which
has the effect of leading to a higher level of amortization on the same level of cash spend — we are concerned that NFLX’s outlook for less operating leverage than historical trends (i.e. pre-COVID), implies slower top-line growth,” Supino wrote.
Netflix is due to report third-quarter earnings after Wednesday’s closing bell.
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