William Blair analyst Ralph Schackart asserted in a research report that the stock of Netflix Inc. (NASDAQ: NFLX) has an upside potential of almost 50 percent. This means that regardless of the present volatile period, the stock’s long-term risk/reward stays favorable. In addition, Schackart upgraded his rating of the NFLX stock to Outperform and boosted his target price to $145.
According to a survey by the investment banking firm, the potential of the millennial demographic shift to hit the long-term client goal of Netflix, which stands at 60 million to 90 million is probably not being appreciated as it is supposed to.
The William Blair analyst said, “Despite concerns about domestic subscribers in the recent quarter, we believe that Netflix will benefit as its 70 million-plus audience of nonpaying, often younger users transition to ages at which they become more likely to pay for Netflix.”
In addition, Schackart believes that if the online streaming corporation can transform 3 percent of this audience into new subscribers, Netflix may manage to add approximately 5.3 million subscribers in the domestic market by the year 2020 via this demographic push.
“The results of our survey, which specifically assesses which age groups are more likely to pay, show that the percentage of existing Netflix users paying for their account increases by nearly 60 percent between the age ranges of 15-19 and 25-29,” the research report indicated.
The William Blair analyst expects that the streaming giant will manage to add net subscribers of about 17.7 million by the year 2020. This figure is equivalent to around 17 percent more than the consensus estimate of analysts.
Schackart also pointed out that the original content of Netflix is being underappreciated as well. The original content of the streaming provider can be considered as its differentiating factor. Based on 600 review scores, the company’s library of original content was better in comparison to that of other providers. Having said that, Netflix has a competitive edge that can enable it to go against its major rivals.
The business model of Netflix is fairly simple: it invests intensively on obtaining content and then charges a monthly fee to its subscribers for access to the content. Moreover, the company also licensed some content from third parties, yet securing these programs is expensive. Netflix intends to pump in approximately $6 billion in cash on content for 2016. Until the first half of the current year, the operating cash flow of the online streaming giant was at negative $455 million. It appears like the company will resume its heavy investments on this segment, especially for its international operations.
The international and domestic subscribers of Netflix for the second quarter of the current fiscal year were lower in comparison to the estimates of analysts. Additionally, its guidance for the third quarter in terms of net subscribers was also weaker than analysts’ forecasts for both international and domestic segments. Its guidance for domestic streaming segment clocked in at 300,000, against the 774,000 estimate of The Street. On the other hand, analysts projected 2.9 million international subscribers, while Netflix’s guidance only stood at 2 million.
Even though the online streaming provider is positive that it can manage to add more international subscribers by adding more payment methods, contents, local languages, and customer support, a number of market analysts still think that this may take longer to happen. At present, the streaming service is only offered in the English language and there are only limited payment methods.
Regardless of all these factors, Netflix can still be considered as No. 1 in the online TV sector, with about 47.1 million subscribers in the domestic market and more than 36 million subscribers internationally.
In an attempt to bolster its presence, the streaming provider has decided to team up with various local media firms in its international regions. Overall, we maintain a bullish stance on the NFLX stock as we are optimistic that it can expand its international subscriber base through its original content.