If you're going to crash the pessimist party, you don't want to get there unfashionably late. FBR Capital is downgrading shares of Netflix (NASDAQ:NFLX) this morning, but the move comes only after the stock has shed 35% of its value since hitting an all-time high two months ago.
This could be a cautionary tale about market volatility, chasing last year's losers, or the pitfalls of market timing. You can cherry-pick your own lesson, but realize that what's going on is that one Wall Street pro is souring on a company after more than a third of its market value has been chopped off despite improving fundamentals.
FBR Capital analyst Barton Crockett feels that domestic subscriber growth is slowing at a time when streaming competition is intensifying. He is downgrading the stock from outperform to market perform, slashing his price target on the stock from $125 to $100.
Investors would have probably appreciated this shift in sentiment back in December, when the stock was peaking north of $133, but let's address Crockett's concerns. Is domestic subscriber growth slowing? Absolutely. Just 28% of the 5.6 million net subscribers that Netflix added during the holiday quarter were stateside streamers. When you already own roughly half of the current addressable broadband market, subscriber growth is going to decelerate.
Thankfully, there is more to Netflix's domestic business than sheer subscriber growth. Netflix has now pushed through two small price hikes over the past two years, and even longtime members that were grandfathered in on the original monthly plan of $7.99 a month will start paying more for their high-def streams in a few weeks.
Perhaps even more importantly, the flip side to U.S. video buffs accounting for a smaller chunk of the growth is that international users are now accounting for a larger portion. A whopping 11.7 million of the total 17.4 million subscribers that Netflix gained through 2015 were international customers. This validates the model on a global basis, but it will also help eventually turn Netflix's losses overseas -- the deficits that are eating into its healthy domestic profitability -- into positive earnings. That's important, don't you think? With so many bears relying on myopic views of near-term profits, anything that pushes Netflix from the current phase of investing in international growth to the lucrative phase of profiting from its international investments can silence the naysayers.
Crockett is also concerned about the competition, but it's an odd week to make that claim. On Tuesday we saw Disney blame a dip in operating income at its media networks division on equity losses in Hulu. Higher programming and marketing costs at Hulu may be resulting in increased viewership, but it's going to be a headache for Hulu's big media owners that are trying to put out other fires in their empires.
Then we learned that HBO Now -- the stand-alone HBO streaming platform that was deemed by some to be a threat to Netflix -- had a lower-than-expected 800,000 subscribers by the end of 2015. That's not too shabby for nine months of work, but even Netflix's seemingly meandering stateside business grew by 4.1 million subs during those same three quarters. If HBO Now is a threat and Netflix is growing five times faster, I'd call that a success.
The S&P 500's best-performing stock of 2013 and 2015 is going through a rough patch in 2016, but it's more a matter of the market's distaste for growth stocks these days. Netflix's model is doing just fine, and I don't feel as if I should have to apologize for arriving unfashionably early to the optimist party.