Netflix Stock Falls as Citi Cuts Rating on ‘Lofty’ Expectations
Netflix (NFLX) shares experienced a 2% drop in pre-market trade after Citi strategists downgraded the streaming giant’s rating from Buy to Neutral. The analysts cited concerns about “lofty expectations” for Netflix in both 2024 and 2025. These expectations include accelerating revenue growth, expansion of EBIT margin, controlled increases in content spending, robust free cash flow (FCF), and significant share repurchases. Citi analysts believe that these high expectations have contributed to the stock’s downgrade.
Concerns Over Optimistic Expectations for Netflix in 2024 and 2025
Citi analysts pointed out the optimistic outlook for Netflix in the next two years, noting robust expectations across various metrics. This includes expectations for accelerating revenue growth, expanding EBIT margin to new highs, limited increases in content spending, and sizable share repurchases. However, Citi is cautious about the high level of expectations and highlights the potential risks associated with them.
Citi Analysts Highlight Three Specific Risks for Netflix
The Citi analysts raised three specific risks they see for Netflix. First, they mentioned the possibility of lower revenues, which could hinder Netflix’s ability to meet its ambitious growth targets. Second, Citi highlighted the potential impact of higher cash content costs on the company’s profitability. Lastly, they noted the potential risk of mergers and acquisitions (M&A). Although Netflix has not historically pursued large-scale M&A, Citi suggests that if the firm does not buy back significant stock in the next two years, it may have more than $8 billion in net cash, providing ample capacity for pursuing M&A opportunities.
Potential M&A Move by Netflix to Counterbalance Risks
While Citi acknowledges that Netflix has not pursued significant M&A in the past, the analysts believe that if Street estimates are accurate and Netflix refrains from significant share repurchases, the company may have the financial capacity to engage in M&A. Citi speculates that the most likely target for Netflix would be a video game publisher with a robust portfolio of intellectual property (IP). This move could help Netflix expand its content offerings and potentially tap into the booming gaming industry.
Citi Downgrades Netflix Stock, Believing Risk-Reward is No Longer Compelling
Considering the risks associated with Netflix’s high expectations and the potential for lower revenues, higher cash content costs, and a potential M&A move, Citi analysts downgraded Netflix stock from Buy to Neutral. They no longer find the risk-reward profile for investing in Netflix to be compelling. However, Citi maintained a price target of $500.00 per share, implying a potential upside of about 3% based on Monday’s closing price. Investors will be closely monitoring Netflix’s performance in the coming months to see if the company can meet the high expectations set for its future growth.
Analyst comment
Neutral News: Netflix Stock Falls as Citi Cuts Rating on ‘Lofty’ Expectations.
As an analyst, I predict that Netflix’s stock will experience some volatility in the short term due to the downgrade. However, if the company can meet the high expectations set for its future growth, there is potential for a slight upside in the stock price. Investors will closely monitor Netflix’s performance to assess its ability to meet these expectations.
