Wall Street’s love affair with Netflix continues as yet another firm has upped its price target on the video streaming company. Netflix has earned a rash of upward price target revisions over the last month or so, However, Citi and Societe Generale analysts bucked the trend and downgraded it last month.
Analysts at Raymond James are firmly in the bull camp on Netflix based on their survey work and research. They believe traditional media companies will have to act more like tech firms in order to catch up to Netflix.
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Raymond James target moves to $730
In a report dated July 6, Raymond James analysts Justin Patterson and his team reiterated their Outperform rating on Netflix and upped their price target from $585 to $730 per share. The main reason for their target increase was a recent survey they conducted which shows that usage of Netflix in the U.S. continues to improve.
Also they think the company’s strategy of offering original content sets it apart from other video streaming services and in turn cuts down on churn and provides pricing power. Further, they think Netflix’s margins will be able to “materially” expand after 2016 following the completion of the company’s international expansion. And finally, they think Netflix’s enterprise value is “reasonable” compared to media companies at about 43% of Time Warner’s enterprise value.
Survey shows positive results for Netflix
The Raymond James team outlined the results of their recent consumer survey. One broader trend they noticed that’s a huge positive for Netflix is that more than half of respondents had either canceled their cable TV, were planning to cancel it, or were simply not interested in cable. Most respondents cited flexibility in schedule and convenience as the reasons they preferred on-demand video to linear video (a.k.a. cable). (All charts/ graphs in this article are courtesy Raymond James.)
They found that Netflix’s retention rate improved in the second quarter, with 49% of consumers planning to keep the company’s service compared to 41% in March. Also the percentage of consumers who don’t subscribe to Netflix and don’t plan to has declined, although so did the percentage of consumers who would consider subscribing to it.
Why do people subscribe to Netflix?
They also found that consumers have become even more interested in the company’s original content, as 54% subscribed for that original content compared to 49% in March. Also the percentage of consumers who subscribe to watch movies or TV shows has declined.
Clearly Netflix is aware of this trend, as it is planning to launch more than 320 hours of original content this year, which is triple the amount it launched last year.
So far this year, the Raymond James team noted a faster pace of releases and a higher quality of scores on the Internet Movie Database (IMDB). The analysts found in their research that Netflix’s original content lags that of pay-TV in terms of the number of hits but exceeds that of broadcast channels like HBO and Showtime.
Netflix is also doing well versus the competition in streaming video, as it holds a commanding lead over competitors. In fact, it was the favorite service of half of their survey’s respondents. Further, the Raymond James team pointed out that Netflix continues to show strong growth in subscribership despite new competition from HBO Now.
Netflix’s big advantage
The Raymond James team made a very interesting observation in research and development and capital expenditures. They explained that Netflix has already invested in building up its cloud technology and now is working to figure out content. By contrast, traditional TV providers are lagging behind Netflix in terms of technology.
As a result, they see a race going on, with Netflix racing to figure out content and pay-TV racing to figure out the tech behind streaming video. In this horse race, they see Netflix as being the likely winner. They note that Netflix has three times as many job openings for engineers as HBO does, indicating just how much of a tech company it is.
As of this writing, shares of Netflix were down 1.43% at $652.51 per share. Raymond James analysts view any selloff in the company’s shares as a buying opportunity.