That Netflix announced a blow-out number is pretty much undisputed after the company's earnings event a couple of days ago.
Along with blow-out numbers, investors saw almost-universal upwards revisions along with price target bumps higher in reaction from most Wall Street analysts.
The day after the earnings announcement a number of investors asked me if I though Netflix could hit $400 per share in the coming months?
The short answer is yes, it's certainly possible. And yes, I am well aware of the current valuation of Netflix. However, consider the following:
If Netflix can hit 250 million to 300 million subs by 2020 or so, what would one pay now for the company?
Thus far, despite the screaming and shouting from the always short gang about sky-high valuations, sky-high OpEx, sky-high production and content costs, Netflix subscriber additions are showing no signs of saturation. Even Stateside, the number is consistently higher than what the Street has been estimating which proves that the cord-cutting phenomenon is alive and kicking strongly.
Just a sampling for your reading pleasure, courtesy of Wall Street's sell-side post the company's latest earnings event a couple of days ago.
Pivotal raises Netflix price target to $420 per share from $400 per share on better subscriber additions in Q1;
KeyBanc raises PT on Netflix to $385 per share from $300 per share.
UBS raises price target from $345 per share to $375 per share and says that shares will continue higher thanks to the company's ability to compound sub additions.
JPMorgan raises price target from $328 to $385 saying that Netflix posted "another impressive quarter".
Even the most bearish of Street analysts have been forced to move their price targets higher (which is a laugh if one thinks about it), albeit reluctantly I am sure, as the company continues to post numbers ahead of the most bullish Street expectations.
The fact that cord-cutting is real and it is here to stay is undeniable. So many millennials don't even have traditional tv (satellite/cable) in their homes and apartments anymore but are avid subscribers of Netflix, Prime and Hulu thrown in as well.
So, we have continued very strong subscriber additions from Netflix quarter in, quarter out and year in and year out. Now consider the following for a moment or two:
What if by 2020, Netflix does have 250-300 million subscribers and has been successfully raising monthly charges at a rate of about a $1 or $2 per month every six months or so until 2020? We could then be looking at annual revenue run rates of around $70B or more at that point if we take the high end of rate hikes and estimated subscriber count by 2020.
Thus far, the monthly rate hikes that the company has implemented so far has had virtually no effect on subscriber additions/retention and churn (due to higher subscription charges) is almost negligible despite the dark-side beating their chests and wailing about attrition rates that are non-existent. Price elasticity/control seems to be in the hands of Netflix is also indisputable, if one ignores the sweaty-palmed hand-wringing and looks at the facts.
The one caveat to hitting that $400 per share number is the noisy screaming and shouting by the dark-siders regarding China trade wars, interest rates, wage inflation, Syria, Iran, Russia, Washington mess, and now the latest about rising oil prices creating continued havoc in the markets and causing Chuckles aka Mr/Mrs Market to have a breakdown. Or, whatever the topic du jour might be at any given moment.
So, back to Netflix, the question an investor has to ask herself/himself, 'Is Netflix cheap or expensive right now based on a possible subscriber base of 250-300 million over the next few years and monthly subscription charges of $20-$25 per month at the time?'
To me, the answer is fairly obvious.
Shares of Netflix closed on April 18, 2018 at $334.52 per share.
(Long nflx, amzn)
PS: Amazon just announced that it has 100 million paid Prime members globally. (Further validation in a big way for both companies)
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