Shares of Netflix (NFLX) are under pressure this morning after UBS analyst Eric Sheridan downgraded the stock to Neutral, citing valuation and his view that there is no "pronounced upside" expected to come with its second-quarter results. The analyst believes his new rating now reflects the 117% year-to-date advance in Netflix shares and recommends "hitting pause on binge buying". 

MOVING TO THE SIDELINES: In a research note to investors, UBS' Sheridan downgraded Netflix to Neutral from Buy, while raising his price target on the shares to $425 from $375, citing valuation. The analyst pointed out that the stock has appreciated 35% since the first quarter earnings report and 117% year-to-date, and argued it already reflects a 40 times GAAP EBITDA multiple on 2022 estimates. The analyst believes any good news is "all priced in," and recommends "hitting pause on binge buying." In addition to valuation, Sheridan does not see a "pronounced upside" to second-quarter results versus prior quarters.

While acknowledging that trading momentum might care little about valuation as growth and industry leadership remain in focus and that Netflix could surprise with better second quarter results and third quarter guidance, he thinks the stock reflects little in the way of any risks to the downside from competition, free cash flow burn and dependence on capital markets for content spending goals. Based on UBS Evidence Lab data and Sheridan's analysis, the analyst now estimates that Netflix will likely report an in-line domestic subscription result versus guidance with solid upside in international subscriptions driven predominantly by India strength. His U.S. credit and debit card spend tracker also shows persistent stability in Netflix's monthly brand incidence rate, indicating no material churn even under the recent U.S. rate hike. Additionally, Sheridan pointed out that UBS Evidence Lab Google search trends analysis suggests sequel seasons for many core franchises in the second quarter are underperforming prior seasons. Nonetheless, Netflix has a "very robust" third quarter slate already announced, which could reinvigorate consumption/search trends but likely means the realization of content and marketing spend, he added. Meanwhile, his peer at B. Riley FBR told investors in a research note of his own that searches for new Netflix shows slowed to flattish versus the year-ago period, and year-over-year growth in global searches for the term "Netflix" also slowed somewhat. Analyst Barton Crockett pointed out that this is the first time he has detected flattish growth since the "big originals ramp started." Amid heightened expectations, the analyst finds the flattish search volume as "potentially cautionary." Crockett reiterated a Neutral rating and $313 price target on Netflix shares.

WHAT'S NOTABLE: Bullish on Netflix, Canaccord analyst Michael Graham raised his price target on the stock to $500 from $350 and reiterated a Buy rating ahead of the company's earnings on Monday, which will kick off FANG earnings season. In a research note to investors, Graham said that while the Netflix valuation and recent stock doubling make him "nervous," he sees scope to increase subscriber estimates.

PRICE ACTION: In morning trading, shares of Netflix have slipped about 2% to $410.36.