Netflix – Lower Price Target

NFLX : NASDAQ : US$448.59

Target: US$450.00

Netflix is the world’s leading Internet television network
with over 50 million members in more than 40 countries
enjoying more than one billion hours of TV shows and
movies per month, including original series. For one
monthly price, Netflix members can watch as much as
they want, anytime, anywhere, on nearly any Internet connected device.
Investment recommendation
Netflix reported results after the close with weaker-than-expected
subscriber trends notably in the US. Although financial results were
largely in line with expectations, the company believes that the $1 price
increase – in addition to certain market factors including large-scale
credit card data breaches – contributed to the net addition weakness.
While we believe the shortfall is due to neither intensifying competition
in this nascent category nor penetration maturation, we are nevertheless
reducing our estimates and price target accordingly.

Investment highlights
 Material shortfall on subscribers – While we anticipated domestic
add trends would rebound strongly following dramatic network
improvements during the quarter, the price increase appears to
have dampened the impact. Despite an improved content library,
managing any price increase relative to such improvements remains
a delicate balancing act, in our view.

 Financial metrics remain solid – We note financial metrics for Q3/14
were largely in line with expectations. Adjustments to our forecast
reflect a lower subscriber base, higher marketing and G&A spend.
Continue to play the secular trend – Despite the fact that Q3/14
produced unexpectedly-weak subscriber trends and a weaker-than expected outlook, we continue to believe management will refine
their approach in determining the appropriate mix of pricing
changes to content improvements that will continue to redefine the
programing as we know it. With the changes, however, we are
reducing our estimates and price target to $450 from $550


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