Netflix, the best stock of 2015, gets hit with a downgrade

Better watch out.
Better watch out.
Image: Reuters/Mario Anzuoni
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Despite coming off a truly phenomenal year in which it more than doubled its stock price, Netflix may have a harder time holding onto its success in 2016.

Baird Equity Research downgraded Netflix’s stock from “buy” to “neutral” today (Jan. 4), citing concerns that the company’s US subscriber numbers may have hit a plateau; that rising content costs and Netflix’s plan for international expansion are major risks; and that the company’s high valuation could cause outsized movement in the stock.

“The push towards increased original programming and content costs generally could pressure profitability and cash flow more than expected,” Baird analysts William Power and Steven Beckert wrote in a note. In addition: ”The international markets have lower broadband penetration rates, lower credit usage, and lower TV [average revenue per users], all of which could hamper Netflix’s growth in those markets,” Power and Beckert said. A subscriber survey by the firm of 3,000 US consumers also revealed flat user growth.

In the wake of the downgrade, the streaming company’s shares slipped roughly 7%, to $108.

In the year ahead, Netflix will also face a key challenge in the form of competitor growth. While Amazon, Hulu, and YouTube are not quite big enough to take on the streaming giant, they “loom as potential bigger competitors,” Power and Beckert wrote. The analysts also noted that Netflix’s competition isn’t limited to other streaming services—it includes cable and satellite video providers, as well as new initiatives like TV Everywhere (a broadcast business model that allows customers to access network content online) and Aereo (a now-defunct startup that let subscribers view live streams on internet-connected devices). Netflix’s original premium content also competes with that of established studios like HBO, Showtime, and Cinemax.

All this is to say: To keep ahead this year, Netflix—unlike its 69 million subscribers—won’t be able to just sit back and chill.