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Netflix Stock Hit With Analyst Downgrade

By Joe Tenebruso - Nov 25, 2019 at 7:15PM

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A major investment bank issued a dire warning for the streaming star's investors on Monday.

Not everyone is a fan of Netflix ( NFLX 0.40% ).

The high-flying streaming leader is beloved by its long-term investors, many of whom have earned fortunes from its stock's breathtaking ascent over the past decade. Many Wall Street analysts are also ardent Netflix bulls -- but one notable investment firm is raising a red flag today.

The return button on a keyboard labeled sell.

Image source: Getty Images.

Wells Fargo analyst Steven Cahall downgraded Netflix's shares from market perform to underperform on concerns regarding the streaming company's cash flow generation. Cahall also slashed his price target on the stock from $308 to $265.

Cahall is concerned with Netflix's inability to generate higher profits from its current 158 million-strong subscriber base. He also believes that adding new subscribers will be more expensive for Netflix than many investors currently expect, particularly now that it's facing intensifying competition from the likes of Disney, Apple, and AT&T.

As such, Cahall estimates that Netflix will generate $18 billion less in free cash flow than Wall Street is currently modeling for the period between 2019 and 2025. Moreover, Cahall posits that slowing growth will result in a lower valuation for Netflix's stock in terms of its price-to-earnings multiple.

"We don't doubt Netflix will eventually turn a cash profit with arrows in the quiver like cracking down on password sharing, curtailing content spend, or even advertising," Cahall said. "But all of these indicate a more mature growth business likely with a lower multiple. If content is king, then cash is queen."

Despite Cahall's warnings, Netflix stock finished up 1.6% on Monday.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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