StockBeat: Netflix Falls on Downgrade as Analyst Says Valuation Too Hot

Investing.com – Netflix (NASDAQ:) needs to up its subscription prices in order to justify its current valuation, which is running too hot, Citigroup (NYSE:) said as it cut its outlook on the streaming-media giant.

Citigroup analyst Jason Bazinet cut his rating on the stock to neutral from buy, and price target to $325 from $410. Netflix (NASDAQ:) fell 1.5%. Some of the decline may be due to Tuesday’s market slump.

“The bulk of Netflix’s growth stems from net adds (which require high marginal costs on content, marketing and technical expenses),” Bazinet said. “In our view, to justify the valuation, the firm needs growth to come from material price hikes,” he added. In this case, net adds means net new subscribers.

“Over the last eight years, every $1 billion sequential increase in cash content spend results in 7 million net adds,” Bazinet added. “Our numbers suggest that if content costs rise, Netflix’s equity could fall 15%,” he added. “If net add forecasts come down, Netflix (NASDAQ:) equity could fall 5%.”

The streaming giant, however, is unlikely to hike prices until the majority of Netflix’s U.S. subs are cord-cutters and competition moderates, which would likely take “many, many years,” according to Bazinet.

Netflix (NASDAQ:) is up about 14% for the year and has an average price target of $363, according to consensus estimates from Investing.com.

The shares are down about 21% from their 52-week high of $385.99, reached in early May.

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