Analyst Downgrades Netflix After Brexit

Martin sees risk of slower sub growth in U.K. and Europe
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Analyst Laura Martin of Needham & Co. has lowered her rating for Netflix from buy to hold following the vote by Britain to exit the European Union.

In a research note Tuesday, Martin said she also lowered her earnings estimates for the second half of the year for the streaming video giant because Brexit “adds fundamental risks that decelerating GDP growth in the U.K. and E.U over the next 12-24 months will accelerate churn of Netflix subscribers (cancelable at any time), or slow subscriber growth.”

That could have an impact on profitability because content fees are at fixed rates and not based on subscriber levels.

Martin also notes that the E.U. has proposed legal changes that would force Netflix to air more local content and fund European-made films.

“If Netflix chooses to exit certain E.U. markets to avoid these requirements, this would slow international subscriber growth,” she says.

Martin says the U.K. and E.U. now represent about one-third of Netflix’s international paying subs and about 15% of its total subs.

Her new figures have Netflix’s revenue growing at 23.7% in 2016, down from 25% and 22.9% in 2017. She pegs earnings per share in 2016 falling 25% to 21 cents in 2016, compared to her earlier estimate of 23 cents, down 17.9%. For 2017, Martin sees Netflix’s earnings per share rising to 99 cents, up 371%, compared to the previous forecast of 330% growth.

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