Citi Downgrades Netflix, Cites “Lofty Expectations”

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Citi strategists downgrade Netflix (NFLX) from Buy to Neutral, leading to a 2% pre-market decline. The rationale behind the downgrade revolves around concerns about high expectations for the streaming giant in 2024 and 2025.

Key Points:

  • Rating Downgrade: Citi analysts lower their rating on Netflix due to “lofty expectations” reflected in optimistic metrics for 2024 and 2025. The stock’s rating shifts from Buy to Neutral.
  • High Expectations: Analysts note that the Street anticipates robust results in the next two years, including accelerated revenue growth, EBIT margin expansion, controlled content spending, strong free cash flow, and substantial share repurchases. Citi believes these expectations are exceptionally high.
  • Specific Risks: Citi identifies three key risks: potential lower revenues, increased cash content costs, and the possibility of mergers and acquisitions (M&A).
  • M&A Possibility: While acknowledging Netflix’s historical avoidance of large-scale M&A, Citi suggests that if the firm doesn’t pursue significant stock buybacks and Street estimates are accurate, it could amass over $8 billion in net cash by 2025. This might lead to M&A activities, with video game publishers seen as potential targets.
  • No Compelling Risk/Reward: Citi states that considering these risks, they no longer find the risk/reward profile compelling, leading to the downgrade.
  • Maintained Price Target: Despite the downgrade, analysts maintain a $500.00 per share price target on NFLX stock, suggesting approximately 3% potential upside based on the previous closing price.

Citi’s downgrade of Netflix stems from concerns about exceedingly high expectations for the streaming service in the coming years. Specific risks and the possibility of M&A activities contribute to the decision, leading analysts to find the risk/reward ratio less appealing. While maintaining a price target, the downgrade reflects a reassessment of Netflix’s potential performance amid the evolving landscape of the streaming industry.

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