It's no secret that the streaming video market is a wall-to-wall competition right now. Between established brands like Netflix (NASDAQ: NFLX) and Hulu, and traditional media looking to save their market share by joining in the streaming stakes themselves, there's no shortage of options here. A new Citi analyst, Jason Bazinet, who's targeting Netflix, led his coverage off with a very disturbing prediction.
A Surprise Bone of Contention
Bazinet started in on covering Netflix in a darker light than his predecessor almost immediately. His predecessor had Netflix as a “buy” rating, but Bazinet dropped the outlook to “neutral”. While that's not exactly a death knell for Netflix—a FactSet study features 27 buy recommendations, 12 holds, and four sells out of a total of 43 analysts—it's a drop nonetheless. That assents with some of our earlier coverage on Netflix, where we noted 25 downgrades to the stock's outlook in the preceding 90 days.
Bazinet also put out a price target of $325 per share, about $15 over the previous close of 309.99. Finally, Bazinet concluded with a note to investors that current estimates of Netflix's future share price are out of line, noting they're “too high.” We wondered if the stock had found a bottom just recently, and Bazinet's projections suggest we might be right.
This is a significant, and almost immediate, departure; Citi's Mark May, back in July, noted that there was a “buying opportunity” for Netflix after second-quarter subscriptions came in lighter than previously projected. May's price target for Netflix was $410, and previously, he'd had it at $420.
Two Potential Pitfalls Ahead
So what's with Citi's turnabout on this one? Bazinet pointed out that, in recent years, there has been a clear link between amounts spent on content and new subscribers. Reasonable enough; the more content there is, the more reason there is to sign up and the less chance you'll run out before your subscription does. There's nothing worse than a streaming service full of shows you've already seen, and most won't stick around for such a proposition.
However, that's changed recently, and current forecasts suggest this change may become much more visible in the near future. Thus, Bazinet notes that either content spending needs to rapidly escalate or subscriber estimates need to fall. Neither outcome is good for Netflix, but one is better than the other: if Netflix ramps up spending, it means a hit to margins and a 15% loss in share prices. Sacrificing viewership, meanwhile, means just a 5% drop.
The Big Netflix Problem, or, Don't Count on Your Enemies for Help
Bazinet's remarks here actually aren't anything new. People who follow the streaming market even casually know that Netflix has had the Sword of Damocles parked over its share prices for years.
When Netflix got started, it was one of very few such games in town, and a way for content providers—mainly studios—to get their product online, where people were increasingly interested in watching that content. They leased the content out to Netflix, effectively, and Netflix provided the infrastructure to actually show that content. Netflix also ran a DVD rental service, though that's become more of a sideshow in recent years.
After seeing the stratospheric rise of Netflix, the studios—who were providing the content—likely began to wonder why they weren't cutting out this middleman and launching their own Netflix-style infrastructure.
That's when streaming platforms began to mount and give us options like Disney+, and left Netflix with a serious problem. Without all that content to offer, what would keep subscribers in house? Sure, there would likely be a nice surge when the next season of “Stranger Things” hit, and Netflix has enjoyed successes with its original content before, but that's nowhere near the number of options it's had before.
Streaming services need content to survive. It's the big reason anyone stays with a streaming service. Netflix may be about to see the disastrous result that follows when you can't offer the content that subscribers want, or worse, what happens when all you have is what you made yourself.
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