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Netflix has Room for Growth Even as Morgan Stanley Cuts Price Target

10:00 AM EDT, 10/14/2019 (MT Newswires) -- Netflix (NFLX) still has a "runway for growth" and fears of competitors emerging are getting overblown, according to Morgan Stanley, which still opted to cut its price target on the stock and take a "more conservative approach" to subscriber and pricing increases.

The investment bank lowered its target to $400 from $450 in a note Monday, but kept its overweight rating on the shares of the on-demand video company. Morgan Stanley also sees earnings per share at a compound annual growth rate of about 45% from this year to 2024.

Morgan Stanley said Netflix has long been in a competitive industry, building a service of 150 million-plus members globally while competing with pay television, live sports and news. Also, e-commerce giant Amazon.com (AMZN) has spent more than $20 billion on content since rolling out instant video in 2011, and Netflix has been losing access to studios such as Fox "for years."

"At the same time, new streaming options on the margin could shave off some gross additions, leading to downside risk to net additions expectations," Morgan Stanley analyst Benjamin Swinburne said in a note.
Netflix paid net additions might have peaked, or could do so this year or next, according to Morgan Stanley. But that doesn't necessarily mean the business has "reached saturation," Swinburne said.

"History has shown that given time, Netflix can drive penetration levels to unexpected heights across a variety of countries and regions," he said. "While we acknowledge the uncertainty associated with scaling in emerging markets, over half of the estimated paid net additions over the next three years are still expected to come from the more developed international markets launched prior to 2016."

Netflix is set to release its third-quarter earnings on Wednesday after markets close. In a separate note, Wedbush Securities said they expect revenue of $5.25 billion and earnings of $1.05 per share, with domestic subscriber additions of 800,000 and international of 6.2 million.

"Upside to total subs guidance appears likely given the solid slate of new content that debuted in Q3, which should help dampen domestic churn," said Wedbush analysts Michael Pachter, Matthew Breda and Nick McKay, who have an underperform rating on Netflix amid expectations for content losses to "steadily mount for the next several years."