Netflix could be caught in a 'race to the bottom,' analyst warns

Published Mon, Oct 7 20198:56 AM EDTUpdated Mon, Oct 7 20194:09 PM EDT

Michael Sheetz @in/michaeljsheetz @thesheetztweetz

Evercore ISI cut its expectation for Netflix shares on Monday, warning investors that the stock has become increasingly controversial and the company's pricing may now be in a "race to the bottom" versus other online streaming services. "The narrative around NFLX shares has started to shift away somewhat from a story defined by accelerating subscriber growth," Evercore analyst Vijay Jayant said in a note to investors. "We wonder whether new services with lower price points (Disney+, Apple TV+) may somehow cap Netflix's pricing power even if they are not direct substitutes from a content offering perspective at present." Netflix shares initially slipped in premarket but later rose to close up 0.6% at $274.47 a share. Evercore lowered its Netflix price target to $300 a share from $380 a share. The firm has an in-line rating on the stock. Netflix stock has fallen nearly 30% in the past three months, erasing its 2019 gains. Disappointing quarterly results in July were compounded by investor fears of growing competition from Amazon , Disney , Apple and others. Evercore's cut comes after multiple Wall Street analysts have sounded the alarm in the past month regarding Netflix' rising costs and potential losses to its streaming market share. Jayant further scrutinized the company's pricing power, noting that Netflix' "net subscriber additions" may potentially peak this year at the same as the launch of a number of new services "from well capitalized competitors." The analyst wondered whether Netflix' business model and content spending is charting an untenable path. "Has Netflix set a deflationary standard for the industry by spending so aggressively on content while allowing user behaviors like friction less disconnections (churn), binge-watching and password-sharing which create difficulties in managing a profitable subscription business at scale?" Jayant said. Jayant added that some of Netflix competitors "are showing a willingness to deflate the value of a content offering in the hopes of subsidizing more important "core" products." He gave the example of Apple TV+ coming as a "free" part of Apple customers buying a new iPhone or iPad and Amazon offering free next-day delivery for its Prime subscribers. – CNBC's Michael Bloom contributed to this report.

The Netflix logo is seen on a mobile phone.

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