Wells Fargo cuts Netflix rating on engagement risk, weak slate

Investing.com -- Wells Fargo downgraded Netflix to Underweight from Equal Weight in a note Friday, warning that softening viewer engagement and a weaker content slate could pressure the streaming giant's margins and valuation.

Analyst Steven Cahall cut his price target for the stock to $57, implying about 25% downside, and lowered his valuation multiple to 15 times forward earnings from 21 times.

He said the January viewership report, due with fourth-quarter results, is the negative catalyst.

Cahall added that Netflix's engagement trends look worrying, with viewing at 1.6 hours per subscriber a day in the first half, which he estimated was down 8% from 2023 after adjusting for a password-sharing crackdown and geographic mix.

Hours from its top 100 original titles fell in the period, while its U.S. TV share slipped below 8%. "NFLX has lacked big original series & it's showing," he wrote.

The analyst said Netflix appears to be broadening engagement toward gaming, documentaries, reality and video podcasts as it takes on YouTube, but risks missing the watercooler originals that drive member value.

"We see breakout hits as a must for the stock to work again," he said.

His base case is for second-half hours from top 100 originals to fall 21% year over year, with elevated churn risk into 2027. Cahall trimmed his 2027 and 2028 earnings estimates to $3.77 and $4.52 a share.

The analyst acknowledged he could be wrong, noting Netflix's record content spending, a hard-to-forecast international slate and its history of delivering unexpected hits.

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