Netflix stock moved higher on Friday after one firm upgraded it for the big opportunities that may be in the company’s future. There have been concerns about subscriber growth in the U.S., but the firm’s analysts say the opportunities outweigh this one metric.
Netflix’s metrics show solid growth
In a report dated April 1, Atlantic Equities analyst Hamilton Faber said he’s upgraded Netflix stock from Neutral to Overweight and raised his price target from $115 to $160 per share. He called the company’s service “the TV sweet spot” and “a structurally better way to watch TV.” He notes that Netflix doesn’t include advertising in its video streams and allows viewers to binge-watch its “ever-increasing library of content.”
Last year Netflix added 17 million global subscribers, an increase from the previous year’s 13 million additions, and he expects the video streaming service to add 21 million subscribers this year. He added that the average viewing per subscriber climbed 12% last year and the company’s share of U.S. primetime broadband traffic ticked higher as well, from 35% to 37%.
Opportunity in pricing to benefit Netflix stock through earnings
Faber noted that Netflix management guided for more than a 40% increase in content spend this year but added that the company has become the world’s biggest non-sports content buyer. Further, he thinks the company’s platform offers a “very good value” and estimates that the per-hour viewing cost for the average subscriber is only 14 cents, which is 25% of the price viewers pay for traditional pay-TV in the U.S. and comes without advertising, unlike traditional pay-TV.
As a result, the Atlantic Equities analyst also sees opportunities in the area of pricing, although investors will closely be watching the price increase of 14% to 25% for over half of subscribers in the U.S. during the second and third quarters. However, he believes the churn rate will remain small because most of those being affected have been subscribing for a long time. Also he thinks Netflix is still improving its content offerings.
The second and third quarter earnings results will offer some insight into just how much pricing power Netflix might have. If they come in solid, they will reinforce his confidence in the company’s ability to raise prices to spur growth and also be important catalysts.
Opportunities outside the U.S.
Faber also sees opportunities for Netflix outside the U.S., as he sees that 850 million homes in countries where the company has launched are able to afford a subscription. He said this suggests that the streaming platform is in only 9% of addressable homes, and his 2020 subscriber estimate of 160 million suggests a penetration rate of 19%.
He also thinks management has set conservative targets for the company’s margins with a 40% domestic margin for 2020. He added that this implies large growth in content spend per subscriber but notes that this metric has been trending lower, although he doesn’t think it will for this year. He added that if the trend continues, there could be lots of room for upside to Netflix’s earnings.
Netflix stock climbed by as much as 3.43% to $105.74 per share on Friday afternoon.