Netflix is facing increasing competition from players like Time Warner’s HBO NOW and Hulu, but UBS believes the U.S. streaming firm will continue to expand globally. UBS analyst Doug Mitchelson reiterated his Buy rating on the firm, and increased the price target from $600 to $722, which represents an upside potential of over 11%.
Netflix to continue with global expansion
Citing iPhone/iPhade app download data, Mitchelson notes that Netflix impresses on both counts, relative-to-competitors and trend-line basis. Also, considering the international app data, the analyst can see consistency and improvements in all the countries where the firm is operating. Globally, the streaming firm is present in 185 million broadband homes, accounting for one-third of the total market. The analyst views Netflix’s global expansion as strong given the company, which recently launched in Australia and New Zealand, is outperforming local players.
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For Netflix, internal net addition is expected to grow as the streaming firm spreads its services in Japan (this fall), and in Italy, Portugal and Spain (by October this year). In China, India and the rest of Asia Pacific, Mitchelson expects Netflix to unveil its services by next year. Although the analyst accepts that some of the markets will be challenging, he still expects the streaming firm to achieve 12.3% international penetration by 2020, noting “every incremental +/-1% penetration impacts valuation by 4%.”
Original content strategy working
On Netflix’s strategy to improve its original content, Mitchelson noted that it’s been much better than expected as the demand for the company’s original content, such as Orange is the New Black, House of Cards, Marco Polo, Bloodline, and Marvel’s Daredevil, is impressive.
Despite potential pitfalls such as rival Hulu “winning a number of major content auctions (AMC, Turner, Empire, Seinfeld)” and “media mgmts” willing to support Netflix competitors and “the pay TV ecosystem, we continue to believe Netflix’s superior content position will continue unabated.”
Similar to the first-quarter, Mitchelson forecasts a strong second-quarter, light third-quarter and robust growth thereafter. However, the analyst lowered the EPS estimate for the second-quarter and for the full-year from $0.26 to $0.21 and from $0.95 to $0.75, respectively. The EPS estimate has been lowered due to rising expansion costs, but the analyst sees strong long-term fundamentals for the streaming firm.
At around 2 pm EDT Friday, Netflix shares were down 0.8% at $660.52, and year to date, the stock is up over 90%.