Netflix, Inc. (NASDAQ:NFLX) stock soared to yet another record high on Thursday amid buzz involving a comparison with Walt Disney Co (NYSE:DIS). Netflix stock comes close to Amazon stock right now in terms of bullish analyst notes to start out the year. Today an analyst initiating coverage of the streaming giant said that Netflix and Walt Disney will be the two big media giants, although in some respects, they’re already there.
Netflix stock price target set at $245
Barclays analyst Kannan Venkateshwar initiated coverage of Netflix stock with an Overweight rating and $245 price target. He said the company has the potential to become “one of the most successful media companies.” He cited the company’s global footprint and addressable market of about 550 million broadband subscribers, pricing power, growing library, shift toward local content and greater “stickiness” caused by multiple seasons of its popular original series.
He also believes that “consumer inertia” will ultimately become a major driver of growth for Netflix, just as it already has been in overall patterns of media consumption. He explained that this “inertia” typically provides benefits to early movers and leaders in the media industry and should enable the company to keep growing its prices while helping its costs and possibly improving its margins gradually.
Challenges for Netflix
Venkateshwar noted that there are some challenges for Netflix stock as it is no longer a small company that’s pulling from competitors’ shares of the market. It’s now a leader, which means that competitors are focusing on it. Further, he argued that Netflix isn’t a “platform” like Amazon, Google, Apple or Facebook are, in his view.
He stated that the streaming firm’s business model limits opportunities to bundle services or products, and it doesn’t have the deep pockets that Amazon, Google, Apple and Facebook have. He also pointed out that it could become difficult for Netflix to gain access to premium content as the media space consolidates and it faces off with local competitors in overseas markets.
On the other hand, the analyst likes Netflix’s management team, especially their “vision and execution,” which he called “meaningful offsets” to these challenges. In his view, what’s unique about Netflix is the way it is put together and not the building blocks it is made of. He feels that the formula would be difficult for a competitor to replicate and believes that none of the company’s large competitors have set forth a “compelling vision of a product that consumers truly care about.”
Is Netflix stock expensive?
Venkateshwar acknowledged that many argue valuation when it comes to Netflix stock, but he argued that the market’s way of valuing the company isn’t very different from how it values media firms such as CBS or Time Warner. He describes this method as being “in terms of steady state margins, asset turnover and reinvestment rates.” Because he sees similarities in the way the market values all of these media firms, he doesn’t feel that the price of Netflix stock is “unreasonable.”
On the other hand, he also sees valuation as being “in some ways a self-fulfilling prophesy” for Netflix stock. He explained that during high-growth periods like right now, investors are willing to look beyond earnings to subscriber and revenue growth. However, if the streaming firm starts to miss subscriber estimates—as it did in recent years due to the “un-grandfathering” in connection with a past price increase—then the focus for Netflix stock will probably return to earnings and cash flow, possibly at “an unfavorable point in the valuation cycle.” However, he doesn’t see this happening any time soon.
Netflix and Walt Disney are already there: Cramer
“In our opinion, in the next 3-5 years Netflix is likely to become the second biggest media company by revenue (ignoring studios and theme parks), next only to Disney,” the Barclays analyst added.
However, CNBC’s Jim Cramer believes Netflix and Walt Disney already occupy the top two spots in the media industry. He said in a video posted on The Street that “Netflix is bigger than everyone but Disney” already. He also said that he feels Barclays was “late to the story of Netflix” and warned that Netflix stock could take “a break” soon like the other FANG stocks have.
The break taken by the other FANGs hasn’t lasted long, however, as Alphabet, Amazon and Facebook have all started out the new year strong. Netflix stock touched another high in intraday trading on Thursday, rising more than 2% to touch $217.75.