Netflix, Inc. (NASDAQ:NFLX) stock is back on a steady upward march on Wednesday after ending Tuesday in the red. The year started with a rerun of the rumor about Apple buying Netflix, but analysts who are truly bullish on Netflix stock see plenty of other reasons to buy it despite the nosebleed valuation.
Too much noise for Netflix stock?
In a note on Wednesday, MKM Partners analyst Rob Sanderson reiterated his Buy rating and $245 price target for Netflix stock, advising investors not to overthink things when it comes to the streaming firm. He feels that all the talk about competition, consolidation in the media space (due to Walt Disney’s pending acquisition of Twenty-First Century Fox’s entertainment assets), and net neutrality are nothing but noise.
However, he also said that such talk has created a buying opportunity for Netflix stock again, just as it did during the fourth quarter. Nonetheless, he feels that the company is a long-term investment with a case that’s “actually quite simple.”
Why Netflix stock?
For example, he pointed out that Internet TV is much cheaper, and with lower prices comes higher demand. He noted that over-the-top streaming TV brings much cheaper distribution than pay-TV and argued that the user experience is better as well. He also explained that it the compression of “one layer of content aggregation and the associated margin” enables Netflix and other over-the-top streaming providers to offer prices that are much lower than pay-TV prices for a product that’s arguably much better.
He also noted that Netflix has been able to expand globally because it rides on the Internet, while pay-TV providers can’t do that because it depends on them having a local presence and facilities in every single market. Further, he said that owning global licensing for content allows for “amortization of programming budget across many more homes,” adding that a larger content budget shared across a huge user base creates an even better value proposition for everyone.
Of the FANGs, greatest potential is for Netflix stock
The MKM analyst also believes that Netflix’s peak years for subscriber additions are probably yet to come. He said that consensus looks for 2017 to be the peak year, but anecdotal evidence from some of Netflix’s earliest markets indicate that usually, the company’s subscriber adds peak in about the fifth year of its presence in a market. He added that based on this, three-quarters of Netflix’s international markets are still two or three years from their peak years of net subscriber adds.
Eventually, Sanderson sees the potential for the streaming company’s earnings per share to surpass $30, assuming 90 million domestic and 300 million international subscribers, a blended average revenue per user of $12.50, and a $25 billion programming budget. Out of all the FANG stocks (Facebook, Amazon, Netflix, Alphabet (GOOGL), he believes Netflix stock bears the highest potential to appreciate its market capitalization.
Preparing for earnings
Netflix is set to release its next earnings report on Jan. 22, and Bank of America Merrill Lynch analyst Nat Schindler reiterated his Buy rating and $233 price objective on Netflix stock going into that report. He expects the company to remain competitive as it grows its subscriber base and continues to develop original content.
Like Sanderson, he isn’t worried about Netflix having any real problems with the end of net neutrality or any other regulatory issues. He feels the company has the ability to deal with these issues, adding that Netflix had long-term agreements with Internet service providers, which he believes should protect it from the reversal of net neutrality.
For the fourth quarter, the consensus expects Netflix to post earnings of 42 cents per share on $3.28 billion in revenue. For fiscal 2018, Schindler is slightly ahead of consensus on revenue at $15.4 billion (versus $15 billion), while for earnings, he is quite a bit below, at $1.88 per share, compared to the consensus of $2.28 per share. Schindler expects the company’s international subscriber base to hit 78.7 million this year.
Netflix stock surged by nearly 2% to a new record high of $213.64 in intraday trading before backing off slightly.
