Netflix Shares Slip After UBS Cut to Neutral on Valuation

A UBS analyst says Netflix's long-term narratives "remain intact." But he cut the stock's rating to neutral as its valuation has run up.
Publish date:

A UBS analyst expects Netflix  (NFLX.)  to continue to benefit from the coronavirus shutdown, but he downgraded the shares to neutral from buy, saying investors have factored this benefit into the streaming giant's shares.

Shares of the Los Gatos, Calif., company at last check were down 3.9% to $505.04.

Analyst Eric Sheridan, who has a price target of $535 on Netflix, said in a note to clients that for the second quarter in a row, "we expect Netflix's earnings report to demonstrate a widespread benefit as the covid-19 environment continues to impact consumer behavior and consumption habits and user-growth dynamics remain strong."

Streaming-video services have increased during the coronavirus pandemic as consumers stay at home to comply with social distancing and quarantine requirements.

"Unlike prior periods over the last few months (with debates centered around competition with Disney, balance sheet vs. free-cash-flow generation, content costs/competition)," Sheridan said, "investor fears seem to have disappeared.

"[The] current stock price increasingly reflects many of the long-term business moat dynamics including sustained growth in users/revenues and steady-state margin expansion."

Sheridan said the company's long-term narratives remain intact, "but we would rather be constructive at levels when a mix of potential subscriber volatility, free-cash-flow dynamics and competition are better reflected in the share price."

Netflix is scheduled to report second-quarter earnings on Thursday. Sheridan noted that Netflix has seen increasing competition in the subscription streaming space.

"We expect subscription streaming video will come to dominate TV over time, creating sufficient room for numerous competitors to Netflix," Sheridan said. 

"Regardless, we believe Netflix will likely remain the leader due to its scale, strong execution/expertise in tech, and original content and will be able to command pricing power with consumers for the foreseeable future."