Investing

One analyst did not like what he saw out of Netflix earnings

Key Points
  • Macquarie downgrades Netflix to neutral and lowers its price target to $325 a share.
  • "We think it will be hard for Netflix to grow much more in the US, and we suspect pricing power is limited," the firm says.
  • Netflix reported third-quarter earnings that handily beat Wall Street's expectations but delivered much lower U.S. subscriber growth than anticipated.
Netflix Co-founder, Chairman & CEO Reed Hastings attends a Q&A during a Transatlantic Forum in Lille, France.
Sylvain Lefevre | Getty Images

Despite a surge in Netflix stock, Macquarie Research downgraded its rating of the streaming service to neutral from outperform on Thursday, saying the company's quarterly results were "comforting, but competition is coming."

"We think it will be hard for Netflix to grow much more in the US, and we suspect pricing power is limited," Macquarie analysts Tim Nollen and Jordan Boretz said in a note to investors. "Content costs continue to rise and marketing demands will remain high, and the turn to positive [free cash flow] will take many years, while another debt raise is forthcoming."

Before Netflix reported third-quarter results on Wednesday, its shares were down 25% from their all-time high as fears mount about the launch of rival services from the likes of Disney and Apple. Netflix's third-quarter earnings handily beat Wall Street's expectations, with revenue coming in nearly on track as well. But Netflix delivered much lower U.S. subscriber growth than anticipated, even as international subscribers growth remained strong.

"In some ways Netflix has defied the naysayers in Q3, coming close enough to guidance and delivering impressive revenue and earnings growth," the Macquarie analysts said. "We still think its opportunity is excellent, especially internationally where sub adds should continue to step up. But it's hard to deny the US is maturing."

Netflix stock rose 2.5% to close trading Thursday at $293.35 a share. Macquarie also lowered its price target on Netflix to $325 a share from $375 a share.

– CNBC's Michael Bloom contributed to this report.

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