What: Shares of streaming on-demand television and video service Netflix (NASDAQ:NFLX) fell $5.54, or 1.2%, in Tuesday's trading session following a "generous" price target increase from Wall Street research firm Sanford C. Bernstein.
So what: According to a research note released by Claudio Aspesi, the analyst at Bernstein who covers Netflix and kept his firms' "underperform" rating but raised its price target to $290 from $260, Wall Street's consensus expectations for international subscribership are too generous.
Per Aspesi, Netflix will face a number of headwinds in overseas markets, including poor broadband infrastructure in some countries, which isn't improving, and tough competition from the likes of Amazon.com and Snap in other more developed markets, such as Germany. In other words, Aspesi believes most analysts are underestimating the competitiveness of this industry. Aspesi's future estimate for international subscribers (no timeframe given) is about 70 million, whereas some of the most bullish Wall Street analysts project Netflix could garner 100 million international subscribers within five to 10 years.
Utilizing Germany as an example, Aspesi does expect Netflix to be the largest streaming video on demand (SVOD) player in the country, with a projected 7.2 million subscribers, or 40% of Aspesi's projected 18 million person SVOD market in Germany. But Aspesi also notes that its peers are closing fast when it comes to price, picture quality, and selection.
All told, Aspesi's price target raise implies Netflix's fair valuation is 39% lower than where it closed on Tuesday.
Now what: The real question that investors need to ask themselves here is whether or not Netflix's fair valuation is really that much lower than its current price.
On one hand, there's little denying that Netflix made the right move by focusing on streaming and expanding beyond the United States' borders. While it's still losing money on its international subscribers, the long-term trajectory shows that international sales could have the potential to dwarf those of the U.S. by the end of the decade. If Netflix can eventually scale back its costs in the international market, the margin from international users could make Netflix very profitable. Based on Wall Street's estimates, Netflix could see its EPS quintuple from an estimated $3.43 in 2015 to a projected $17.29 in 2018.
On the other hand, Aspesi has some very solid points. Who's to say that Netflix won't have difficulty getting similar pricing in international markets where its brand isn't as well known? Also, it's not far-fetched to assume that poor infrastructure could significantly slow Netflix's expansion pace overseas.
Personally, I tend to err on the side of caution with Aspesi. While Netflix has had little trouble garnering new international subscribers -- adding 2.43 million in Q4 2014 from the sequential third quarter -- the international business is still losing money. The implication here is that the company could be dealing with pricing pressures and an overseas consumer used to a lower price for SVOD services. For a company with a forward P/E of 85, I'd expect flawless execution, and I'm just not seeing that. While $290 may not be in the cards, I'd surmise that there's more downside risk than upside potential at this point.