Netflix, Inc. (NASDAQ:NFLX) coverage was initiated by Suntrust Robinson Humphrey analyst Bob Peck on Wednesday, with the streaming video service given a neutral rating and a price target of $525. While the price target has quite a bit of room to the upside, about 8% based on Netflix, Inc. (NASDAQ:NFLX)’s current value, Peck expressed hesitancy concerning the stock on CNBC yesterday, citing the baked-in expectations that the stock has, and some of the other fears that surround the cost of its future operations.
“It reminds us a little bit of our initiation of Yelp. When we initiated $100, we thought the street had baked in a lot of expectations, and were looking to get more constructive upon a pullback. So with this we think same sort of idea. We think a lot of expectations are baked in. In fact when you do the math, you assume at what is the market assuming as far as subs in 2010[sic], it’s about 160 million subs or so. It’s a fair guess, a healthy guess, it’s what we have in our model, actually outperforming near term here, it’s going to be difficult to do,” Peck said.
Another concern for Netflix, Inc. (NASDAQ:NFLX) is how rising competition like Amazon, Hulu, and Sky will affect them on various levels, not only in terms of subscriptions and pricing, but also in terms of content costs. With Netflix, Inc. (NASDAQ:NFLX) having recently spent a reported $1.75 million per episode to land the Batman origins series, Gotham, and another $2 million per episode for Sony’s The Blacklist, those costs could quickly spiral out of control and cripple margins when bidding for shows intensifies among streaming providers.
And as Peck added, if Netflix, Inc. (NASDAQ:NFLX) tries to forego expensive licensing costs by creating more of their own original content, they still run the risk of creating an expensive disaster like John Carter.
Highly touted investor Carl Icahn is one of Netflix, Inc. (NASDAQ:NFLX)’s largest shareholders. His hedge fund, Icahn Capital Lp has more than 1.7 million shares in the video streaming service.