Netflix's weak subscriber additions at odds with lofty valuation

Reuters News
Posted: Oct 15, 2015 8:09 AM

(Reuters) - Investors are likely to question Netflix Inc's premium valuation after the video-streaming service said on Wednesday that third-quarter subscriber additions in the United States came in below its own expectations.

Netflix shares fell 3 percent to $107.30 in premarket trading on Thursday.

The video-streaming service provider had forecast an addition of 1.15 million subscribers in the its home market in the quarter, but ended up with just 880,000.

But analysts' remained largely upbeat about the long-term prospects of the company.

At least four analysts raised their price target on the high-flying stock on Thursday. J.P. Morgan analysts were the most bullish, boosting their target to $137 from $127.

Netflix blamed the disappointing numbers on the mandated transition to chip-based debit and credit cards, but some analysts said the reason seemed unconvincing because these cards have been around for a while.

The company has wooed fans with original shows such as "Orange is the New Black" and "House of Cards", but faces stiff competition from Hulu, a smaller but increasingly popular streaming service.

Hulu has managed to win away lucrative film franchises from Netflix including "Hunger Games" and "Transformers".

As well, Inc, which rebranded its streaming service as Prime Instant Video, has shaken things up with shows such as "Transparent."

"Our concern on NFLX shares considers valuation in the context of increased video competition, as content owners work more hand-in-hand with (over-the-top) providers," Evercore analyst Ken Sena wrote in a note.

Sena has a "sell" rating on Netflix's stock and a $69 price target.

Netflix's stock has more than doubled this year. It trades at 356.6 times forward 12 month earnings, versus a peer median of 12.9.

(Reporting by Lehar Mann and Eileen Soreng in Bengaluru; Writing by Sayantani Ghosh; Editing by Saumyadeb Chakrabarty)