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Goldman Analyst Says 'Neutral' for Netflix

20 Dec, 2010 By: Chris Tribbey

Goldman Sachs analyst Ingrid Chung placed a neutral rating on shares of Netflix Dec. 20, saying the increased bandwidth needed to stream Netflix content will eventually lead to Internet service providers, or ISPs, rolling out tiered broadband packages.

That would likely increase the cost of Netflix’s current $7.99 unlimited streaming option, she wrote, either with Netflix raising the price, or with subscribers’ ISPs charging customers who subscribe to Netflix more. She targeted Netflix stock at $200. Shares of Netflix were down nearly 2% to $178.05 in afternoon trading.

“[ISPs will] eventually roll out tiered broadband service based on download speeds attached to varying usage caps," Chung wrote. 

Chung wrote that her firm expects Netflix to end the year with 18.3 million paid subscribers, or 23% of U.S. broadband households. She foresees Netflix expanding outside of North America by the second half of 2011. 

“Our subscriber projections suggest that Netflix will reach around 20% penetration of broadband households in the company’s total addressable market by 2015. As Netflix’s business model transitions to streaming and away from physical media (DVD, Blu-ray), we expect the company to become more aggressive in securing digital rights to film and television content,” she wrote.

Chung wrote that Netflix’s physical media business will peak by the end of 2013, and that the company will go completely to a streaming model by the end of 2020. But increased competition from Amazon, Hulu, Google and cable operators could put a damper on Netflix’s continued growth, she concluded.

On Dec. 16, investor Whitney Tilson, founder and managing partner of T2 Partners LLC, wrote an article for SeekingAlpha.com, echoing those concerns.

“We acknowledge that the company offers a useful, attractively priced service to customers, is growing like wildfire, is very well managed and has a strong balance sheet,” he wrote. “So why on earth would we be betting against this stock? In short, because we think the valuation is extreme and that the rapid shift of its customers to streaming content (vs. mailing DVDs to customers) isn't the beginning of an exciting, highly profitable new world for Netflix, but rather the beginning of the end of its incredible run. In particular, we think margins will be severely compressed and growth will slow over the next year.”

That earned a long — though friendly — response Dec. 20 from Netflix CEO Reed Hastings.

“Whitney lays out a series of potential issues for us: our CFO’s recent resignation; threats to the First Sale doctrine for DVDs; Internet bandwidth costs potentially increasing; declining [free cash flow] conversion; market saturation; weak streaming content; paying more for streaming content; and increased competition hurting margins. He only has to be right on one or two of these issues in 2011 for him to make money on his short of Netflix,” Hastings wrote.

“Odds are he is wrong on all of them, in my view,” he added.

Hastings’ full response can be read at

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