Netflix Updates: Analysts Too Negative on Stock, U.K. Competitors Ready to Spar

Netflix’s (NASDAQ:NFLX) stock slipped some last week as several analysts continued to weigh in negatively as well as its international expansion in the U.K. and Ireland looking like it will attract stiff competition from local companies like Lovefilm and Blinkbox.  To add to its troubles, the company’s credit ratings were downgraded. For players like Amazon (NASDAQ:AMZN) and Blockbuster under Dish Network (NASDAQ:DISH), this is a golden opportunity to take advantage of a weakened Netflix’s. The question that remains is, can Netflix recover from this slump?

See our full analysis for Netflix

Analysts Negative, Credit Rating Downgraded

Recently, an analyst from Wedbush Securities has expressed his negative views about the company. According to the analyst, the damage done has no immediate fix. He believes that the company will find it difficult to replace the lost revenues as hybrid subscribers defect or shift to streaming-only services. This will be accompanied by significant rise in content costs in 2012. As a result, losses could range from $100 million to $300 million according to the same analyst. Not just Wedbush, several other research firms’ price targets indicate that either they are advising investors to hold the stock, or sell it.

To add to the above, S&P has downgraded Netflix’s credit rating to BB- as a result of uncertainty about company’s business in the near term and expected losses to be incurred in 2012. This outlook gets strength from the fact that local competitors in U.K. are gearing up better than ever to stop Netflix from gaining momentum in new geography.

Our Take

We think that just like the bulls were too bullish when Netflix was doing well, the bears are getting too quick to dismiss the company now. The company is maturing and still agile enough to react to changes or adversity. Getting content for international expansion even though it will lead to losses may be the right move as it will position Netflix for long-term gains. Even the company’s management has stated that if they had not struck the deals, they would have lost the content for several years.

The market potential is there and Netflix’s lead against its closest competitors still exists. Netflix is in multiple markets and diversifying risk, although some may not agree given that the company has, and is going to, spent upfront significantly on content for these markets. Over time the damage to brand can be repaired, provided Netflix has learned its lesson.

Our price estimate for Netflix stands at $142, implying a premium of more than 100% to the market price.

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