Netflix Stock May Have Run Out of Steam

Netflix, Inc. (Nasdaq: NFLX) stock hit the ground running in 2018, but even some of the biggest Netflix bulls are a getting a bit uneasy about the stock’s nearly 70 percent gain in just over two months. On Wednesday, Stifel analyst Scott Devitt downgraded Netflix and says the stock’s share price has become detached from the company’s underlying business fundamentals.

According to Devitt, Netflix’s fourth-quarter numbers were certainly impressive. Netfix reported 8.3 million global subscriber additions, blowing consensus analyst estimates of 6.3 million additions out of the water. Netflix’s first-quarter guidance of 6.3 million additions also handily beat consensus estimates of 5 million. Devitt says he is among the many analysts who are increasingly optimistic about Netflix’s international expansion following the fourth-quarter report.

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Unfortunately, the stock has skyrocketed from less than $200 to above $320 per share in a little over two months, and Devitt is finding it difficult to justify further upside.

“We are attracted to Netflix’s business and competitive position but believe share price may have sprinted ahead of fundamentals in the short term,” Devitt says.

Despite the downgrade, Stifel is expecting Netflix to once again beat consensus subscriber growth projections in 2018. The firm is projecting 25.9 million net additions compared to consensus estimates of 23.6 million additions.

But Netflix is also paying a steep price for its growth. The company expects to spend roughly $8 billion on content in 2018. Stifel is expecting that content cost to grow to $10.2 billion in 2019 and $12.2 billion in 2020. Netflix anticipates it will burn through $3 billion to $4 billion of free cash flow this year, suggesting the company is still a long way from profitability.

In addition, Devitt says Netflix will likely need to raise roughly $3.6 billion in debt to pay for its aggressive investments. With market expectations for the stock already sky-high, he says there’s simply little room for upside.

“We believe share price outperformance over the next several quarters may be more difficult to achieve given the recent run and increasing expectations,” Devitt says

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Stifel has downgraded NFLX stock from “buy” to “hold” but has raised his price target from $283 to $325.