Netflix stock climbed in premarket trading on Tuesday after an analyst upgraded it as part of a broader realignment of his strategy on media stocks. The new strategy favors subscription-based media businesses over ad-focused firms due to the growing trend of ad avoidance among consumers. Before that upgrade, another analyst suggested there’s a relatively high probability we will see Apple buying Netflix.
Netflix stock upgraded to Outperform
In a note on Tuesday, Macquarie analyst Tim Nollen said he has upgraded Netflix stock from Neutral to Outperform and set his price target at $220 per share. In addition to a subscription focus, he also favors firms with “scaled distribution with an international presence.”
Nollen believes that Netflix “changed the way people watch TV and notes that it is pushing even further into the film industry. He explained that consumers are taking steps to avoid advertising more and more, and this habit is causing them to shift to over-the-top streaming services.
How Netflix is driving improved revenue, earnings quality
Additionally, he likes the “improving quality” of the streaming firm’s revenues and earnings. He believes that the streaming firm is looking beyond what he describes as “the market’s obsession” with subscriber numbers by trying to improve its earnings and revenue quality.
He explained that the next round of subscription price increases is now beginning, which should improve the firm’s revenue quality. Further, he said the firm is expanding its distribution relationships with global cable TV providers and telcos and pushing international growth via local content. He also pointed out that Netflix is trying to reduce password sharing, which could increase its subscriber count even further.
He argued that the streaming firm is “actually being more judicious” about how much it spends on original content, contrary to the many headlines reporting that it’s willing to spend $20 million per original TV episode. Nollen believes Netflix can save money by spending less on licensed content.
One continuing risk for Netflix stock is its negative free cash flow, which is why so many analysts are concerned about original content spending. However, Nollen also pointed out that investors don’t seem to care about this, based on the runaway value of Netflix stock. The net neutrality repeal could also be a risk if telecom firms decide to take advantage of their new ability to begin charging the streaming firm for Internet fast lanes for its customers.
No threat from Disney + Fox combo
In his upgrade report on Netflix stock, Nollen also described Netflix as being “miles ahead of peers,” noting that Walt Disney’s “eventual” streaming service is still a couple years away.
Many analysts who cover Disney praised the acquisition of Fox’s entertainment assets and stake in Hulu because the Fox deal positions Disney to become a more formidable opponent to Netflix and Amazon Prime Instant Video. However, Nollen doesn’t expect Disney to threaten Netflix at all because Netflix continues to hold a strong domestic subscriber base and is also “establishing passion brand status in many international markets.”
Apple buying Netflix? Same suggestion, new year
Netflix stock also may have been supported by another report from Citi analysts. According to Business Insider and numerous other media outlets, Citi analyst Jim Suva argued this week that there is a 40% probability of Apple buying Netflix, thanks in part to President Trump’s corporate tax cut. The iPhone maker’s domestic cash pile is expected to become much larger because of that tax cut and a one-time tax repatriation holiday.
Suva and team analyzed several potential acquisition targets for Apple, and of the options, they gave the possibility of Apple buying Netflix the highest probability. BI states that the note was actually written before the Disney-Fox deal was announced officially, and at the time, they gave a 20% to 30% probability of Apple buying Disney.
This isn’t the first time we’re hearing an analyst suggest we could see Apple buying Netflix, and the argument remains standard: Apple wants original content and a strong presence in streaming. Citi analysts argued the same thing in May 2017, and several others suggested the same thing even before that. In fact, suggestions about Apple buying Netflix stretch back years to at least May 2016.
According to Suva’s latest report, if we do see Apple buying Netflix, the iPhone maker would only need about one-third of the expected $220 billion in cash it’s expected to have after it repatriates its cash.
Netflix stock surged by as much as 3.28% to $198.25 in early trading on Tuesday.