Will Incoming Competition Derail Netflix (NFLX) Stock?

Investor pay off may not be immediate, but the digital-video maven is fundamentally well positioned to be successful in the long-term.

Netflix NFLX

Shares of Netflix, Inc. (NASDAQ:NFLX) dropped nearly 1% to $98.72 Thursday morning, extending their year-over-year slide to 14% as persisting concerns about decelerating user growth and increasing competitive pressure in online video streaming market from pure online players like Amazon.com (NASDAQ:AMZN), Hulu and YouTube keep intensifying.

Netflix gained 1.7 million new members during 2Q16, compared to the 2.5 million it had forecast. In a statement to shareholders back in July, the company said that although gross additions were on target, churn increased unexpectedly.

For the third-quarter of 2016, the streaming giant is forecasting 2 million net additions versus 2.85 million the Street has predicted. Netflix had 3.6 million net subscribers in the same period last year.

Increased Competition

It’s no secret that Netflix is facing increasing competition, not only from pay-TV providers, but also from pure-play over-the-top players. This fact underscores the company’s need to reinvest, according to Deutsche Bank (NYSE:DB) analyst Bryan Kraft. And that’s what Netflix is trying to do as it continues to spend massive amounts of cash to boost the quality and quantity of its original content production. The company is likely to spend a heart-stopping $5 billion on original content this year alone.

“With penetration exceeding 50% of U.S. broadband homes, the incremental subscriber is more difficult to attract,” wrote Kraft recently in a research note to investors, adding that the banking giant sees “the incorporation of Netflix into cable and direct broadcast satellite set-top boxes, as well as continued content and user experience spend as drivers of continued subscriber growth, albeit at a decelerating rate.”

So, the real question now given these slowing growth signals is whether this is a sustained decline in terms of user growth or only a temporary setback for the company. Many would interpret these metrics as a big red flag for NFLX investors. However, according to Pacific Crest’s Andy Hargreaves, Netflix subscription growth is expected to re-accelerate in Q4’16 and into fiscal year 2017.

The analyst, who maintains a $125 12-month base case estimate on Netflix stock and recommends a ‘Buy’ rating on the name, notes that while the company’s Q3 results will be hurt by “excess churn” caused by its price increase, its subscription growth will re-accelerate in the fourth-quarter and into FY 2017, pushing the stock higher.

Beyond Netflix’s user growth and churn rates, another important area to watch is the company’s upcoming earnings. Netflix is slated to step into the earnings limelight this coming Monday. Checking in on Q316 numbers, the Street has consensus estimates of $0.06 in earnings per share and $2.28 billion in revenue. In the Q3 of the previous year, the Los Gatos, California-based company posted $0.07 in EPS and $1.74 billion in revenue.

Trading Measures

NFLX currently prints a year-over-year loss of around 10%, significantly lower than a rise of 7.3% clocked by the S&P 500 index over the same time frame.

With its stock at $99, Netflix’s market capitalization stands at just under $41.7 billion.

On valuation-measures, shares of Netflix, Inc. have a trailing-12 and forward P/E of 311.72 and 114.56, respectively. P/E to growth ratio is 6.40, while t-12 profit margin is 1.85%. EPS registers at 0.32.

Of the 40 analysts following the stock, 21 rate Netflix stock ‘Buy’, 12 recommend ‘Hold’, whereas the rest suggest a ‘Sell’ rating.

The company has a median Street price target of $110 with a high target of $130.

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