HSBC Downgrades Netflix Stock, Citing Troubling Trends in User Engagement

HSBC downgraded Netflix stock from a buy to a hold this week, citing troubling trends in user engagement and YouTube’s rising influence on television viewing.

HSBC analyst Mohammed Khallouf  dropped his target price of Netflix stock from $96 to $76, arguing that YouTube has enjoyed a “declining reception” to Netflix’s original content, adding that he believes a “near-term recovery in engagement looks unlikely.” Netflix’s share of U.S. TV time has also steadily dropped 7.8 percent since July, per TheWrap.

As of Wednesday afternoon, Netflix shares were trading at $71.74 apiece, well below its 52-week high of $124.86 per share but still above its 52-week low of $65.08. In addition to its declines in the past year and past six months, Netflix stock has fallen 21% year to date, 10% in the past month and 6.6% in the past five days, but is up 21% in the past five years.

The downgrade comes roughly one week after shares for the streaming giant fell 5 percent following Wells Fargo downgrading its stock due to worrying trends in user engagement.

The report, titled “Engagement Risk,” from Wells Fargo analyst Steven Cahall alleged that the streamer’s user engagement had fallen behind in the Nielsen Gauge, adding that the top 100 titles saw year-over-year slight decline.

“Engagement trends look worrying to us,” the report stated, per The Hollywood Reporter (THR). “TLDR: NFLX has lacked big original series & it’s showing.”

Wells Fargo speculated that the engagement drop may stem from Netflix attempting to compete with YouTube by investing in podcasts, gaming, and other forms of diverse content. To turn the trends around, the report said that Netflix will be making “tougher choices ahead.”

“Options incl a content spend reboot (takes time), licensing 3P content incl live sports (e.g. from FOXA, NBCU) and/or M&A…so a messier NFLX story,” the report said.

“Where we could be wrong: 1) Content spend is at record levels — NFLX has time & again delivered unexpected break-out hits; 2) The int’l slate is harder to forecast & could be potential upside to our hrs est; & 3) NFLX is great value so may still have pricing power/margins beyond our expectations,” it added.