Please ensure Javascript is enabled for purposes of website accessibility

Netflix Stock's Next Stop Won't Be $45

By Rick Munarriz – Jul 12, 2016 at 8:44PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A longtime bear on the digital video darling feels that the stock could be cut in half on weak guidance and looming competition.

Image source: Netflix.

A permabear when it comes to Netflix (NFLX -2.04%) isn't changing his tune. Wedbush Securities analyst Michael Pachter kicked off the week by reiterating his bearish "underperform" rating on the stock. His price target of $45 suggests that the leading provider of premium streaming content could lose more than half of its value. The stock closed Monday at $94.67. 

Netflix announces fresh financials following next Monday's close. Pachter wants to make sure that his negative opinion of the investment is clear ahead of that second-quarter report. He is reiterating his stance because he feels that Netflix's guidance for the third quarter will be weak. It was weak subscriber guidance for the second quarter issued last time out that weighed on the stock, which dropped 13% the day after the report. 

Pachter is also concerned about the competitive climate. Netflix is the undisputed leader in this niche, but rivals aren't exactly asleep at the wheel. He sees Amazon.com (AMZN -0.77%) as a looming threat, especially now that it's offering its Prime Video catalog as a stand-alone offering to folks that don't want annual subscriptions to Amazon Prime. Amazon charges $8.99 per month for just video access while Netflix charges $9.99 a month.

Holding bulls and bears accountable

Netflix stock dipped on this recent bearish note, but the mere 2% decline shows that the market doesn't seem to be taking the $45 price target seriously. The stock would still have to swan dive another 52% to get there.

It also helps the bullish argument to know that Pachter has been on the wrong end of this argument before. He had a sell rating on the stock and a split-adjusted price target of $7.86 in early 2013. That didn't work out too well. Netflix went on to become the S&P 500's biggest gainer that year, a feat it went on to repeat in 2015.

This doesn't mean that a Netflix bear is always wrong. The stock was crushed in 2011. It lost ground in 2014. It's in the red so far in 2016. However, over the long haul it's the bulls that have had the last laugh. 

Let's talk about the real Amazon threat

Amazon offers a pretty sweet value proposition. If you're already a Prime customer ($99 a year or $10.99 per month) relying on the leading online retailer, you get a growing digital catalog of video content at no additional cost. This library was pretty weak a few years ago, but Amazon now has a decent arsenal complete with popular shows and movies as well as some Emmy-winning original content. 

This isn't enough to rattle Netflix. Despite the estimated tens of millions of Prime members with essentially no-cost access to Prime Video, it's still an afterthought for consumers when they want to stream TV. Netflix commands 35% of traffic on North America fixed networks, according to broadband network solutions provider Sandvine's latest survey. Amazon Video has gained ground on weaker players lately, but it's drawing just 4.3% of fixed traffic.

Amazon may have turned heads by offering Prime Video as a separate service from Amazon Prime in April, but at $8.99 a month it's actually more than the annual rate of Amazon Prime -- which includes Prime Video -- over the course of the year. 

The real game changer in Prime Video is that Amazon also lets folks pay for purchases or digital rentals of new movies and TV shows, something that Netflix has been reluctant to offer. The more people it hooks with Prime Video, the easier it will be to sell them online video rentals and purchases down the line. That's when Amazon could get scary, but for now it's clearly not getting in the way of Netflix's ability to grow.

Pachter isn't alone in being concerned ahead of next week's earnings report. A pair of analysts downgraded the stock last week. Netflix doesn't hit it out of the park every quarter, and there are enough Wall Street pros cooling on the stock to make bulls worry. However, it's hard to argue with Netflix's long-term track record. The best S&P 500 performer in two of the past three years still deserves the market's respect. 

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Amazon.com and Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix Stock Quote
Netflix
NFLX
$285.54 (-2.04%) $-5.96
Amazon Stock Quote
Amazon
AMZN
$93.41 (-0.77%) $0.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.