Barclays downgrades Netflix rating, says revenue growth likely to slow

Investing.com -- Netflix (NASDAQ:NFLX ) has built an "exceptional" business fueled by a surge in popularity in content streaming, but revenue growth at the entertainment giant is likely to slow, according to analysts at Barclays.

In a note to clients downgrading their rating of Netflix to "Underweight" from "Equal Weight", the analysts argued that new initiatives like paid subscription sharing and a push to expand margins are "pulling forward" future growth and setting up "unrealistic" long-term expectations for the business.

"Given this backdrop, [Netflix's] present valuation appears out of sync with [its] probable growth path," the analysts said.

The Barclays analysts added that, in order to offset weaker pricing and subscriber expansion in regions where it has the biggest presence, Netflix will have to accelerate advertising revenue growth "a lot faster than it has managed thus far."

"This will need significant inventory growth, which in turn needs significant subscriber and/or engagement growth in the ad tier," the analysts said, referring to its cheaper, ad-supported viewing option.

They added: "This may force the company to do away with the basic tier in more markets and potentially even the standard tier at some point to increase the price gap between the ad tier and non-ad tiers significantly and force more of the base to watch ads. It is tough to see how this doesn’t come with its own engagement tradeoffs."

The comments come after Netflix flagged in July that its advertising unit, which analysts have hoped could become a major source of income for the group, would not become its biggest driver of revenue growth until at least 2026.

Chief Financial Officer Spencer Neumann has also told analysts that while the ad unit is "nicely" increasing, it is building off a small base.

Netflix said its ad tier membership rose by 34% compared to the prior quarter in the April to June period, although it did not specify how many members had chosen the option.

(Reuters contributed reporting.)

Source: Investing.com