Amazon Steals Netflix Thunder as Stock Drops
We have been Netflix (NASDAQ:NFLX) bulls for some time now and it appears the market is now taking notice of the company"s significant underlying value with the most recent quarterly results. While we think the stock might be due for a near-term pullback given its surge since August, we think this is a stock that will double over the next 4 years.
NFLX data by YCharts
The quarter was great and a sign that the company is firing on all cylinders. It reaffirmed a secular shift away from linear TV and toward Internet TV as well as underscored the ability of quality original content to boost sub growth. While the stock might be slightly ahead of itself here, we do think it doubles in the next four years.
Firstly, despite our bullish outlook on the company"s growth trajectory we think the stock might be slightly ahead of itself here. As opposed to looking at the headline subs beat, investors should view this earnings in context with the one before it.
Following an ugly Q2 subs miss, Netflix management significantly lowered the Q3 guide and the stock subsequently sold off to the mid-$80 level on fears that price hikes were shaking subscriber loyalty. But a strong summer slate of original content headlined by Stranger Things coupled with continued lower TV ratings eased those concerns and affirmed that Netflix remains the top dog in the secular growth SVOD space. Consequently, the stock bounced back to and above pre-Q2 levels.
But the low Q3 guide stood, so there was clearly at least a slight Q3 beat baked into the stock. The beat was much bigger than most expected and was a strong affirmation of the potency of Netflix"s original content, so we are not at all surprised the stock moved higher. We are surprised, though, that the stock added roughly $9 billion in market capitalization on a 1.3m net add beat, especially against the backdrop of a 17% rally since the prior ER sell-off. The huge recent moves give us pause to buy up here and we do feel the stock needs some time to consolidate and even retreat before heading higher.
Secondly, regardless of near-term price movement, we think this stock doubles over the next five years. The quarterly results coupled with continued secular declines in cable ratings imply that quality original content does have the ability to extend domestic sub growth. International sub growth is just beginning to ramp and powerful original local content across the globe seems to be having a positive effect on international sub growth. Competition is always a concern in this space, but Netflix"s quality original content is widening its moat and easing those concerns. Higher ARPUs from un-grandfathering are having a materially positive impact on profit margins, which are growing rapidly. The only real concern that remains is the cash flows, which continue to be negatively impacted by heavy original content spend. We think even those will turn around in the near future with revenue scale and opex leverage.
In the long run we think EPS can grow to just over $5.45 by FY20 and just shy of $13.30 by FY25. We think a stock like this should trade around a forward PEG of 1 in FY20, and we see earnings growth in FY21 as 33%. A 33x multiple on our FY21 EPS of $7.24 implies a $240 stock by the end of FY20.
Click to enlarge
The ride to $240 over the next five years will be bumpy, but we think the stock will ultimately end up there and reward patient shareholders.
Disclosure: I am/we are long NFLX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Source: http://seekingalpha.com/article/4012819-netflix-stock-will-double-4-years
