Why 50% Upside in Netflix May Be Too Optimistic

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Netflix Inc. (NASDAQ: NFLX) hit its stride over the past few years and made some serious gains. Many investors rode the online media distributor, and now content-maker too, higher and higher. But at this point, many analysts and investors are taking mixed views on the stock. Questions have been out before about whether the stock’s multiple is too high, and some of those questions persist today. Is Netflix a growth stock or a value stock?

If William Blair is correct, Netflix may still have high returns ahead of it. 24/7 Wall St. wanted to look at some of the points in the call compared to the past, because this is a sharp reversal from a mere month ago. It is also hard to not notice that so many other analysts are far less bullish here.

Netflix is expected to continue its international subscriber growth and keep producing content that consumers want. William Blair’s new excitement is about the millennial factor.

24/7 Wall St. has also explored how much Netflix can grow over the next few years, both in subscribers and revenue.

William Blair analyst Ralph Schackart is taking a very positive outlook on Netflix, after a somewhat neutral rating following the earnings report. He upgraded the stock to an Outperform rating from Market Perform, and raised the price target to $145.

Considering the underwhelming ratings from the Olympics, the perceived risks against Netflix might not be as strong as once thought.

Also Netflix original series are underestimated and will increasingly differentiate the company over the competition. As for the analysis, William Blair analyzed the scores for almost 600 original series and says that Netflix is superior to them all, including HBO.

Looking even further ahead is the idea that millennials will continue to subscribe to Netflix seems promising. This has been an overwhelming trend within this generation. In fact most are moving to cut the cord entirely.

Interestingly enough, when William Blair kept a mere Market Perform rating after earnings in July, Shackart’s report showed the following points:

  • Second-quarter revenue was just below the Street but operating income and EPS were both well above Street estimates on lower-than-expected content and other costs.
  • Second-quarter domestic and international streaming subscribers both came in below consensus estimates.
  • Third-quarter guidance for net subscriber additions was lower than expectations for both domestic (300,000 versus Street at 774,000) and international (2.0 million versus Street at 2.9 million) streaming segments.

His note also said in July about the un-grandfathering levels:

While we ultimately believe Netflix will work through the un-grandfathering near-term transition issues and be a dominant global leader in a large and growing internet-TV market, we believe it may still be a bumpy road for the stock over the next couple of quarters as the “un-grandfathering” process continues. Hence, we will maintain our Market Perform rating.

Excluding Thursday’s move, Netflix has underperformed the broad markets, with the stock down nearly 17% year to date. However over the past month, the stock is actually up about 4%.

Shares of Netflix were trading up nearly 3% at $97.82 Thursday afternoon, with a consensus analyst price target of $105.08 and a 52-week trading range of $79.95 to $113.27.