Is this the beginning of a backlash for last year’s hottest stock? Netflix shares are down 4.4% to $343.76 in morning trading today after Morgan Stanley’s Scott Devitt downgraded the company to “underweight” and dropped his target price 6.9% to $310. Netflix’s current stock price only makes sense if you think that it will have more than 66M domestic streaming subscribers in 2022, up from about 30M in September, he says. But that target grows harder to hit. Rivals including Amazon Prime, HBO GO, and Hulu Plus “offer compelling alternatives to Netflix’s service and each could potentially corner specific segments of the consumer market,” the analyst says. Although Amazon only has about 2% of the streamed TV programming market, the retailer “has invested aggressively behind the business to expand content” and is “catching up very quickly” to Netflix’ reach on mobile devices. Meanwhile, Hulu Plus “delivers arguably the best TV programming in the group” and “is beginning to beat Netflix in being the first video service to the punch on some new platforms” including Microsoft’s Xbox One. HBO GO “has the most quality movies of the [streaming video on demand] services and is the clear leader by a wide margin in original programming” — although it’s only available to people who subscribe to pay TV. And cable and satellite operators may dampen consumer enthusiasm for Netflix as they expand their TV Everywhere streaming services. Investors will be disappointed if Netflix doesn’t add 6M streaming subs in 2014. But Devitt only expects 5.2M additions, declining to 3.1M in 2015. If churn rates grow, then “it may need to add close to 6M gross subscribers per quarter next year to reach our forecast, or about the size of a Hulu Plus every 3 months.”
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