NFLX rallied on Tuesday along with many other major technology stocks as analysts reassured investors that Brexit won’t really be such a bad thing for them after all. For NFLX, international expansion has become a concern rather than a strength, but analysts at Stifel say the concerns are overblown.
Competition concerns for NFLX overblown
Stifel analyst Scott Devitt said in a report dated June 27 that in only three years, NFLX has become a premium video juggernaut. He explained that slowing subscriber growth and a growing original content budget are leading investors to believe that the company is losing its competitive advantage However, he adds that the company still has a large scale advantage over competitors in the streaming video space. Further, it is “on pace to release several times more original programming hours than either” Amazon or Hulu this year.
The analyst believes there is room for more than one winner in the space and points out that there’s already quite a lot of overlap among the services. Additionally, data from Sandvine shows that NFLX is still the dominant streaming video provider in North America by amount of time spent.
He expects next year to bring “meaningful content leverage” and adds that content spend will likely grow more slowly than subscribers and that it could take an additional five years or more to double again. At some point, he said the company will see returns on its incremental content investments diminish and might then stabilize its original programming output.
In the long term, he believes investors could be overestimating how much it will have to spend on original programming per year. He adds that as time goes on, Netflix might depend less and less on third-party content, which could then result in upside to profitability estimates further out. Devitt reiterated his Buy rating and $143 price target on NFLX.
History shows NFLX will be back
History also demonstrates that even though NFLX is going through a period of volatility, it tends to bounce back. InvestorPlace feature writer Dan Burrows notes that sentiment on the company has gotten quite overblown as it trades at around “83 times forward earnings on a long-term growth forecast of about 23% a year.” He adds that such an expensive multiple doesn’t leave much room for error.
However, NFLX stock has come roaring back more than once whenever something has dented sentiment on it. For example, in 2014, the stock declined about 30% at two different times, and then last summer, it declined 20%. Between late last year and early this year, Netflix shares tumbled 35%, and year to date, they’re down 25%.
However, Burrows notes that S&P Capital IQ data indicates a five-year beta of 1.77 for NFLX. The stock soars when the broader market rises and tumbles at times of a broad selloff. However, with great risk has come great rewards as the shares have skyrocketed 1,500% since the current bull market started in early 2009. By comparison, the S&P 500 has “only tripled” during this same timeframe.
Shares of NFLX climbed by as much as 2.68% to $87.62 during regular trading hours on Tuesday.
