We downgrade our recommendation for NET Servicos de Comunicacao S.A. (NETC) to Neutral, which means the stock will perform mostly in line with the broader market. The stock price has moved up more than 150% in the last year and is currently trading at the high end of its 52-week price range. With respect to several valuation metrics, the stock is also trading at a significantly higher multiple compared to both the S&P 500 and the peer averages.

NET Servicos is the largest integrated cable MSO in Brazil and one of the leading pay-TV operators in Latin America, based upon the number of subscribers. Since 2005, the company has been posting impressive operating results Incorporatedluding continued growth in its subscriber base Incorporatedreasing average revenue per user, strong growth in broadband and voice services, better cash flow generation and continued growth in revenues. However, we believe these positives are already reflected in the current valuation, leaving little room for above-market gain.

In Brazil, media companies are suffering from audience fragmentation and limited near-term reinvestment opportunities. Consumers have access to an unprecedented selection of independent media outlets, resulting in audience dilution for most of the traditional media services. To retain their shares, large media companies are forced to reinvest in additional media outlets. However, growth is limited by government regulations on media ownership. Attractive reinvestment opportunities remain challenging.

We are encouraged by the performance and the outlook for the pay-TV service and the continued growth of the Broadband segment. We also believe that NET Servicos is in a unique position to benefit from the growing demand for cheap telecommunication products, new product launches and reliable broadband devices in Brazil.

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