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Street Fight: KeyBanc cuts Netflix rating as peers say 'growth story is back'

In a research note to investors, KeyBanc analyst Andy Hargreaves downgraded Netflix (NFLX) to Sector Weight as he believes improving investment efficiency or significant ancillary opportunities are needed to drive upside from current levels, and he does not anticipate either over the next year. Meanwhile, several other Wall Street analysts raised their price targets on the stock, saying Netflix's growth story is back after the streaming giant announced that it had picked up nearly 7M subscribers in the third quarter. LACK OF UPSIDE: KeyBanc's Hargreaves downgraded Netflix to Sector Weight from Overweight saying its investment efficiency trend must reverse to justify upside. While the analyst remains positive on Netflix's opportunity to grow subscribers, he argued that both revenue growth and accelerating margin expansion are needed to drive substantial upside from here. The latter has not developed at a pace that exceeds his expectations, which suggests upside is more limited. Netflix's leadership position in subscription video provides long-term opportunities to build revenue in consumer products, advertising, broad theatrical releases, and mobile-only subscriptions, he contended, but noted that they will likely take several years to develop. As such, he views the opportunities as roughly offset by risks associated from rising interest rates and growing competition over the next year. Still bearish on the stock following quarterly results, Wedbush analyst Michael Pachter reiterated an Underperform rating on Netflix's shares and raised his price target to $150 from $125 following quarterly results. The analyst told investors that he expects content acquisition spending to trigger substantial cash burn for many years. Notwithstanding three Netflix price increases in the last five years, cash burn continues to grow, he noted. Further, the analyst said international profits may remain elusive due to competition for content and subscriptions, and last year's price increases could cause a deceleration in subscriber growth. NETFLIX 'GROWTH STORY BACK ON TRACK': Bullish on the stock, Credit Suisse analyst Douglas Mitchelson told investors that he believes the Netflix subscriber growth story is back on track with 2018 net additions now estimated at 29.0M, accelerating 22% from 2017's 23.8M, and the content slate expansion potentially driving further acceleration in 2019. The analyst also argued that growth from Asia is kicking in, more mature markets seem to be holding in and Europe likely continues to expand. He reiterated an Outperform rating and $470 price target on the shares. Voicing a similar opinion, Bernstein analyst Todd Juenger noted that while Netflix's rare subscriber miss last quarter caused investors to question whether it as just a blip or an early warning of deceleration, this quarter's blow out result seems to put that debate to rest. The pace of Netflix subscriber growth is "astounding," he contended. The analyst also noted that it took 10 years to go from 0 to 100M paid subscriptions, but he projects it will take only 2 years to go from 100M to 150M. Meanwhile, his peer at Stifel raised his price target for Netflix to $474 from $395 and reiterated a Buy rating on the stock. Analyst Scott Devitt said he believes the company is positioned to add 29M net new subscribers this year and forecasts it will attract 29M next year as well. Reiterating an Outperform rating on the shares, Goldman Sachs analyst Heath Terry also raised his price target for Netflix to $480 from $430. The correlation between content spend and subscriber net additions strengthened for the sixth consecutive quarter, Terry contended, adding that he believes the shares will "significantly outperform" as Netflix subscriber adds continue to exceed expectations and it approaches an inflection point in cash profitability. BMO Capital, Morgan Stanley, RBC Capital, Canaccord, Barclays, and JP Morgan also increased their price targets on Netflix's stock. PRICE ACTION: In morning trading, shares of Netflix have gained almost 5% to $363.45.

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Wedge Partners
Credit Suisse

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