The analyst downgraded Netflix due to increased competition and poor cash flow.
On Monday, a Wells Fargo analyst turned bearish on Netflix. Analyst Steven Cahall downgraded the company from market perform to underperform. Cahall also lowered his price target on the stock from $308 per share to $265.
Shares of Netflix fell midmorning after being downgraded, though they did bounce back by market close. Let’s look more closely at why the company was downgraded, and what this means for Netflix going forward.
Cash flow and competition weigh on Netflix
When it comes to free cash flow, most Wall Street analysts expect the company to break by 2022. But according to Cahall, this is unlikely to happen before 2024, and even then he believes the returns will be modest.
The reason? The company’s ongoing investments in original movies and television shows.
Netflix continues to invest heavily in original content for its subscribers. And given increased competition from companies like Disney, Apple, and AT&T, the company will have to double down on its efforts. According to Cahall, this will continue to weigh on the company’s free cash flow.
Cahall acknowledged that the company will continue to find ways to increase its profits and grow its subscriber base in the coming years. But he believes that both will be expensive to maintain, adding, “If content is king, then cash is queen.”
As far as Wall Street analysts go, Cahall’s opinions on Netflix seems to be in the minority. The company is considered a moderate buy with an average price target of $366.47. Out of the 32 analysts reviewing the stock, most consider it a buy.
For most of 2019, Netflix investors have been anxiously anticipating how the launch of Disney+ would affect the company. But even after a mostly successful launch, recent data suggests that few Netflix subscribers plan to leave the platform and switch to Disney+.
The company isn’t in the clear just yet, but the current signs seem to point to continued growth. Only time will tell if Cahall’s assertions about Netflix are correct.