Netflix’s Buy rating has been confirmed and the price target has been raised from $620 to $780 by Goldman Sachs analyst Heath Terry, in a note on Monday. Terry believes that the streaming company will continue to outperform expectations as it expands globally.
Global expansion holds key
The streaming content firm is aiming to expand internationally, and offer services in 200 countries by the end of 2016, compared to 50 countries currently. International expansion is a “primary growth driver” with international streaming revenue estimated to rise at 58% compounded annual growth rate over the next three years, notes Terry.
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According to Terry, by 2020, Netflix’s addressable market will more than double to 460 million, adding that with a 24% global penetration rate in 2020, the U.S. firm will reach 112 million international subscribers compared to its current 21 million user base. Furthermore, the streaming provider is expected to hit 69 million subscribers in the U.S., up from 41 million presently.
Margins to improve for Netflix
The analyst believes that Netflix’s “increasingly fixed nature” of content costs, subscriber and average revenue per user growth will offer a substantial window to the company to improve its margins over the coming years. Terry expects the company’s operating margins to grow from its current 6% to 19% by 2020.
Terry stated that superior distribution model of the company will enable it to shell out more on marketing and content as it grows. Netflix has the capability to extract more returns from its investment. “As it matures and content costs as a percentage of revenue declines, margins should exceed those of comparable traditional content distributors,” says Terry. In sum, the analyst believes that the growth opportunities for Netflix are “compelling.”
Q2 earnings projections
The online streaming company is all set to announce its second-quarter 2015 earnings on Wednesday, July 15 after the market closes. Analysts are expecting the company to post earnings of $0.31 per share on $1.65 billion in revenue, a drop from $1.15 earnings per share. However, revenue is expected to increase from $1.34 billion in the previous year.
Of the expected $1.65 billion in revenue, the streaming company is estimated to earn $1.02 billion from domestic streaming, $457 million in International market revenue and $164 million in revenue from the U.S. DVD segment.
At around 11 am EDT Tuesday, Netflix shares were down 1.08% at $699.96, and year to date, the stock is up over 100%.