Maybe they were early.
The French bank Société Générale went to a Sell rating on
shares on March 1, 2017, in what clearly was not a particularly prescient call. The stock has since rallied about 250%, including a 55% gain this year; the subscriber count spiked as the pandemic kept people at home.
Yet analyst Christophe Cherblanc is sticking with his bearish stance. On Tuesday, he repeated his Sell rating, while raising his target for the stock price to $270 from $185, still more than $200 below the current stock price.
Near midday, the stock (ticker: NFLX) was down 2.1%, to $492.04.
Cherblanc said in a research note that he is highly positive about Netflix’s fundamental prospects, saying he expects double-digit revenue growth over the next five years. But he thinks the Street has come to dramatically overvalue the stock.
The analyst noted that last week’s June quarter earnings report “confirmed that lockdowns triggered a dramatic boost to net adds, free cash flow and Netflix’s potentially improved competitive positioning,” with viewers favoring the service over its rivals. But he also said management noted that the gains haven’t altered the company’s long-term trajectory, with subscriber additions pulling forward from future quarters.
“Netflix raises a dilemma, with fast growth on a global addressable opportunity, but cash burn despite already large scale,” he wrote. “Investors are therefore essentially ‘buying’ the company’s long-term potential and momentum, which justifies to some extent the obsessive focus on quarterly adds.”
He attempts to find a proper valuation for Netflix by taking a 10-year time horizon. The analyst calculates that the current valuation discounts 21% compounded revenue growth to $138 billion (about six times expected 2020 revenue), $41 billion in pretax earnings (about 10 times 2020 estimates) and 792 million members, roughly four times the current total.
Cherblanc asks if maybe the model is missing something. Could Netflix launch an advertising business? The company has consistently said it isn’t; t interested in an ad model. Could they add premium sports? Cherblanc thinks the subscriber gains from such a move would not be dramatic. Could they boost prices? He thinks significant price increases are getting harder given competitors’ price points.
The bottom line is that the analyst simply doesn’t think the current valuation is defensible.
Write to Eric J. Savitz at firstname.lastname@example.org