Netflix, Inc. (NASDAQ:NFLX) remains well positioned to take advantage of growth in the streaming television industry, but Baird analysts essentially believe that the company’s stock has risen too high too fast. They have initiated coverage on Netflix with a Neutral rating and a $263 per share price target.
Netflix takes a chunk out of streaming TV industry
Analysts William V. Power, Steven J. Beckert and Andrew T. Flis issued a report to investors today explaining their initiation of Netflix, Inc. (NASDAQ:NFLX). They believe that streaming television is the future, although at this point it is still a supplement to cable. They note that Netflix is ideally positioned at the head of the pack in this revolution.
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The company currently has 28.6 million paying subscribers in the U.S., which is a 34 percent penetration of households with broadband. They believe that rate will hit 50 percent by 2017. The analysts are expecting to see “meaningful” growth in international markets, especially Europe, although they note that there’s already some “fierce” competition in some areas. Also lower average revenue per user levels and broadband penetration could make international markets more challenging.
They are expecting to see consolidated revenue growth of 20.5 percent this year and 18.7 percent next year. Streaming revenue growth is expected to be 39.2 percent this year and 27.5 percent next year. They’re also projecting Netflix, Inc. (NASDAQ:NFLX)’s earnings per share to grow from 29 cents per share in 2012 to $1.17 this year and $3.13 next year.
Challenges to Netflix, Inc. (NASDAQ:NFLX)
The Baird analysts point out that shares of Netflix have risen 170 percent so far this year, and they believe that increases in competition, content costs and a steep valuation will counterbalance that rise. They point specifically to competition from Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG), although they also note to competition from other areas. They call Apple Inc. (NASDAQ:AAPL) “an additional wildcard.”
They predict that content costs are going to keep rising, which could pressure margin expansion more than expected. In addition, there’s more uncertainty in international markets, In addition to lower video average revenue per user and broadband penetration, they also see usage of credit or debit to be a challenge.
They note that Netflix, Inc. (NASDAQ:NFLX)’s valuation looks rich on most metrics, although they believe this is somewhat justified by strong secular trends.