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Netflix Stock Hits New High, But Some Still Wonder: Is It A House Of Cards?

Deadline logo Deadline 7/18/2017 David Lieberman
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Wall Street’s in love with Netflix again. Its share price is up about 14% in mid-day trading — and touched an all time high — following its Q2 report last night that showed stronger than expected gains in U.S. and overseas streaming subscriptions.

Netflix is worth $9.9 billion more today than it was yesterday in investors’ eyes as measured by its market value.  At $79.9 billion, Netflix is seen as worth more than Time Warner (at $76.4 billion), Sony ($50.7 billion) and Fox ($49.8 billion).

The streaming video power crossed what it called “symbolic milestones” by amassing more than 100 million global streaming subscribers, now with more overseas than in the U.S. It had 51.9 million domestic streaming customers at the end of Q2, up 1.1 million from the end of March, and 52.3 million abroad, up 4.1 million..

But while bulls are charging, bears still warn that Netflix is a house of cards as it borrows heavily to pay for its growing investments in original content. It burned $608.4 million in cash in Q2, up from $254.1 million in the period last year, and expects to burn as much as $2.5 billion for the year.

Depending on whom you believe, Netflix shares — now at about $183 a share — are headed up to $210 over the next year, or down to $82.

Here’s a sampling of today’s arguments in the debate, ranging from most bullish to most bearish:

RBC Capital Markets’ Mark Mahaney (price target: $210, up from $175):

Netflix continues to defy bear expectations that the company was becoming saturated in the U.S. On top of the Domestic success, International continues to exceed expectations and has now surpassed Domestic in terms of percentage of the total subscriber base, a gap that should widen over time. And to add insult to injury, the company’s International losses are turning to profits given success in early expansion markets. Can you say FLYWHEEL?

Morgan Stanley’s Benjamin Swinburne ($210 from $185):

We believe the rapidly growing content offering, led by originals that in aggregate garnered 91 Emmy nominations last week, drove the stronger new sign-ups in 2Q. Also of note, Netflix saw greater than expected new sign-ups in the mature US market, adding nearly 500K more subs than guidance and up significantly vs. 2Q16

Bernstein Research’s Todd Juenger ($203 from $178):

Every incremental 8.5 million subs equates to an incremental $1 billion of revenue — which Netflix will re-invest in content — which will drive more subs — and so forth.

…We believe the SVOD model is such a superior entertainment value proposition for most viewers and most types of viewing, and Netflix (who invented the concept) will be the “anchor” brand of that service model globally because they’ve achieved unassailable scale, and the global [total addressable market] is huge (with over 1bn existing pay-tv households).

PiperJaffray’s Michael Olson ($198 from $190):

Netflix is the leader in a category that contains massive multi-year growth potential. There will likely be increasing competition and unforeseen hurdles along the way, but we think Netflix has reached “escape velocity.” Others may join Netflix on this path, but as the consumer content dollar spend shifts from traditional broadcast to internet delivery, the market should be large enough to support multiple large players, with Netflix leading the way.

UBS Global Research’s Douglas Mitchelson ( $190 from $175):

We believe Netflix’s core competencies in both content and technology will drive a virtuous circle of greater subs and increased viewing time, enabling higher [average revenue per user] and revenue, which will fuel content spending to attract even more subscribers, and so on, positioning Netflix to sustain its position as the clear global leader in the emerging online video subscription business.

Guggenheim Securities’ Michael Morris ($190 from $180):

Despite an increasingly competitive landscape in this business, we remain confident that Netflix’s strong positioning and investments in content and technology will yield significant, sustainable cash flow over the long-term.

BMO Capital Markets’ Daniel Salmon ($180 from $150):

Netflix’s content strategy is working and continues to drive subscriber acquisition. Content investment will drive cash burn of ($2.0B) to ($2.5B) in 2017, up from previous guidance of ($2.0B). With strong sub tailwinds, we see Netflix pushing investment in original content faster than expected in order to expand its attractiveness across both markets and individual preferences within markets. While licensed fare declines in share, we expect growth to remain robust, especially to fill out the international library.

MoffettNathanson Research’s Michael Nathanson ($136 from $127):

We’ve mused that the current model is akin to a new restaurant serving the best filet mignon for $10 per steak and watching happy patrons fill every seat. At some point, the restaurant’s owners (and lenders) will start asking about a path to generating cash flow on that investment….we just don’t believe that Netflix is building an impenetrable moat that justifies its $80 billion in market cap.

Wedbush Securities’ Michael Pachter ($82, from $73):

We don’t expect Netflix to become meaningfully profitable on a cash basis for several years, and we don’t expect positive free cash flow for the remainder of this decade; even then, we think that positive free cash flow will remain elusive UNLESS the company decides to materially increase price and sacrifice growth. We are skeptical that Netflix’s “Originals” strategy will achieve critical mass sufficient to drive meaningful profitability over the next several years. We think that Netflix is destined to be a cash burning high growth company until it changes its strategy and accepts its fate as a highly profitable slow growth company.

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