Citigroup has downgraded Netflix stock from buy to neutral, citing risks in 2024 and 2025 related to revenue and higher cash content costs.
The firm, which has a price target of $500 per share, warned that Wall Street has “lofty” expectations for the streamer over the next two years, including accelerating revenue growth, reaching new highs in EBIT (earnings before interest and taxes) margin expansion, muted increases in content spending, robust free cash flow and large share repurchases.
Analyst Jason Bazinet noted that Netflix’s growth on a two-year stacked basis grew in the low-to-mid teens between the fourth quarter of 2022 and the third quarter of 2023, with Wall Street consensus calling for similar growth through the third quarter of 2024.
“But, in [the fourth quarter of 2024], the Street expects the two-year stacked growth rate to expand to 25%,” he added. “We think this is unlikely and expect 2024 Street revenue estimates to moderate.”
Citigroup also expects the streamer’s 2025 cash content investment to exceed analysts’ estimates of $18 billion.
“It’s clear that both the COVID pandemic and the Hollywood strikes put incremental pressure on content spending. That makes sense,” Bazinet said. “But the Street expects cash content costs to barely increase from the strike-induced lows of 2023 (and remain below COVID pandemic levels) when expressed as a share of revenues.”
The firm, which factored in changes in revenue, COVID and the Hollywood strikes to its analysis, believes cash content spend will be closer to $20.4 billion.
Additionally, Bazinet believes Netflix could pursue M&A if Wall Street estimates are accurate and if it does not buy back significant stock over the next two years. Analysts currently expect Netflix to buy back $4 to $4.5 billion in stock in 2024 and 2025.
“Over the past few years, Netflix’s gross debt has been around $15 billion and cash on hand has been around $5 billion or more. As a result, net debt has been below $10 billion,” Bazinet wrote. “But, if Netflix does not buy back stock in 2024 and 2025, the firm’s cash balance will likely exceed $20 billion, eclipsing gross debt. That’s akin to $8 billion of net cash by year-end 2025 if the firm doesn’t buy its own stock.”
In the event that the streamer were to pursue M&A, the firm expects it would be most likely to acquire a video game publisher with a robust portfolio of IP.
“Netflix is a well-run company that has executed remarkably well in a highly competitive market. But the equity market has responded to this with a material re-rating in Netflix’s stock over the past few years. And, the sell side expects a fairly robust set of financial results across many key financial metrics over the next two years,” Bazinet concluded. “For our part, we see a handful of small risks – lower revenues, higher content costs, and potential M&A – that, to us, suggest the risk-reward is now more balanced. As such, we are moving to the sidelines.”
Netflix stock, which has soared 53.2% in the past year, is down 0.4% during Tuesday’s trading session following the downgrade.
