A majority of analysts maintained their neutral rating for Netflix despite the company'spositive 4Q financial results, which caused a substantial increase of its stock value. Many question whether the company can justify its current high valuation.
The stock price of Netflix, Inc. (NASDAQ:NFLX) surged from around $80 per share in December to its current value of more than $166 a share as of this writing.
Investors are happy with the positive performance of the stock; however, many are in a dilemma and are questioning if the company’s business would be able to justify the high valuation of its equity.
On January 24, the online video streaming company experienced substantial gains reporting positive financial performance for the fourth quarter of 2012. Netflix, Inc.’s (NASDAQ:NFLX) revenues of $945 million and $0.13 earnings per shares exceeded the analyst’s estimates.
Analysts expected the company to report $934.7 million in revenues and -$0.12 loss. The online video streaming company also added more than 2 million new subscribers during the quarter. By the end of the week, Netflix’s market value increased by 64 percent.
The better-than-expected financial result of the company prompted several research firms to upgrade their ratings and price target for the shares of Netflix, Inc. (NASDAQ:NFLX). At present, the average price target of Wall Street analysts for the stock is $120 per share, based on data compiled by Thomson Reuters.
However, some analysts left a gap between their rating and price target for the stock. For example, Bernstein analyst, Carlos Kirjner raised his price target for Netflix from $71 to $125 per share but maintained his market perform or neutral rating for the company.
In a research note, Kirjner explained that such discrepancy between his target and a stock’s current price would result in a rating of underperform or sell in a normal situation. He said, “ “However, given how volatile the stock has been over the last few days — we think in large part driven by short-covering after the quarter — we will wait for the volatility to subside before deciding whether we should re-rate it.”
Netflix’s performance depends on the number of its subscribers who are currently paying $7.99 a month and the cost of its content acquisitions. The subscriptions fees generated from customers fund Netflix’s content acquisitions. Last week, Netflix CEO Reed Hastings seed, the company will not raise its subscription rates and it primary focus is to improve its content offerings to increase its domestic subscribers by 50 million.
Kirjner expressed confidence that Netflix, Inc. (NASDAQ:NFLX) has the ability to increase its domestic revenue at a faster rate than its expenses on content acquisition, and raise its margin. However, he thinks the Netflix’s domestic streaming business is worth around $53 per share and the total value of the stock is around $125 per share.
Based on data from Thomson Reuters, eight analysts recommended a buy rating while 20 analysts rated the stock neutral and six reiterated their sell ratings.