- Shares of Netflix sank roughly 2% early Tuesday.
- Martin argues that a second, lower-priced subscription option would help Netflix going forward. Without one, she writes that it won't be able to compete with other streaming services.
- Watch Netflix trade live on Markets Insider .
Shares of Netflix slid roughly 2% early Tuesday after Laura Martin, an analyst at Needham, downgraded the stock to "underperform" from "hold."
The downgrade centers on Needham's projection that Netflix will lose 4 million US subscribers in 2020 if it doesn't create a lower-cost subscription option on its platform.
Without a second, cheaper service, it won't be able to compete with Disney+, Apple+, Hulu, CBS All Access, and Peacock, Martin writes. Those services have options that cost $5 to $7 per month, undercutting Netflix's premium price of $9 to $16.
That price is "unsustainable" for Netflix as its perceived price-to-value ratio will fall over time, Martin writes, especially when the platform loses popular shows such as "Friends" and "The Office."
The downgrade is further due to Netflix's refusal to have advertising, which Martin believes will also result in subscription losses. That's important because Netflix's stock price is partially tied to subscriptions, Martin argues when subscriptions fell by 126,000 in the second quarter of 2019, that led Netflix shares to plunge 10% .
In addition, US subscribers generate an average of nearly three times more profit contribution than international subscribers, according to Needham. If Netflix is to lose 4 million US subscribers next year, profit contribution could take a $260 million hit.
If Netflix doesn't introduce a lower-priced subscription option in the US next year, Needham says that the stock "starts to become attractive around $260 per share," which is down about 13% from current trading levels. Needham doesn't give a price target on shares of Netflix.
Netflix has a consensus price target of $353.40 and 29 "buy" ratings, 10 "hold" ratings, and seven "sell" ratings, according to Bloomberg data.
Netflix is up roughly 13% year-to-date through Monday's close .
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