Netflix, Inc. (NASDAQ:NFLX) shares have pulled back by about 30% over the last couple months, and analysts at Piper Jaffray see a buying opportunity in that pullback. As a result, they have upgraded the stock from Neutral to Overweight but maintained their $122 price target. They said that while Netflix will likely still be a volatile stock for some time, they expect the overall trend to be upward.

Netflix, Inc. Slumps Despite Analyst Upgrade

Netflix’s domestic growth slows

In a report dated Feb. 2, Piper Jaffray Senior analyst Michael Olson said that Netflix already has nearly half of its total addressable market in the U.S. (45%) subscribing to its service. He expects the company’s domestic growth to keep decelerating but notes that more and more emphasis is being placed on international growth. Indeed, the streaming company is moving closer and closer to its point of saturation, so Olson believes it will look for its best opportunities by shifting marketing dollars overseas where its current penetration rate of international broadband households is a mere 3% to 6%, depending whether China is included in that percentage.

His long term analysis suggests that the company’s international penetration rate will reach 10% by 2020 or 79 million international subscribers. He expects more than 140 million global streaming subscribers by then, including 62 million domestic subscribers.

Size of the competition up for debate

The Piper Jaffray analyst noted also that there continues to be debate about competition in the video streaming industry, adding that this debate will go on for a long time. He said worries about competition have been reignited recently, although he doesn’t think much has changed. He notes that there are still some very aggressive competitors in the market and believes they will spend more money on content, resulting in higher and higher content costs, although this has been going on for the last five years, he says.

He still thinks the “tidal wave of online video market growth” is big enough to carry along more than one big player in the industry.

Looking to international margins

Olson sees Netflix’s international contribution margin as being a key metric going forward as the company has become an international growth story, but he sees room for upside between 2018 and 2020. Although management has said that its domestic contribution margin should reach 40% by 2020, Olson is estimating a 30% international margin. He thinks that if the international margin reaches 40% by 2020 it could add $1 or 20% to his 2020 earnings estimate.

Netflix shares slipped by as much as 2.57% to $91.67 per share during regular trading hours today.