Netflix (NFLX) stock on Thursday morning is nearing its lowest level since the start of the year, but for some bullish analysts that makes for an opportunity to pounce on rather than panic.
The Los Gatos, California-based streaming giant isn't giving investors reason to purr on Thursday, marking the biggest one day percentage drop in years. Yet, as the multiple contracts, and price targets among many analysts continue to trend toward $400, the risk reward may be just balanced enough for speculative buyers to build a position.
"We believe our previous expectations for subscriber and revenue growth, as well as margin, are still mostly intact, with just a -2% negative revision to revenue," Deutsche Bank analyst Bryan Kraft said. "Consequently, we would be buyers on the weakness."
He noted that the blockbuster figures from the first quarter, a lighter content schedule, and the changes in price are not recurring issues and should be something the company can indeed move past as subscriber trends and content schedule normalizes.
"The content slate continues to grow, reaching more audience segments with more content of interest to individual segments, and producing more hits," Kraft added. "As Netflix matures as a studio, its resources, creative bench, and ability to focus on creative excellence should drive higher content quality and increase the value proposition, while also appealing to a broader segment of the global population."
He maintained his "Outperform" rating based on the optimistic outlook and a quite bullish $410 price target.
The second half slate is already promising a turnaround in the view of many analysts.
"We continue to view the 2H content slate as perhaps NFLX's best-ever w/new seasons of Stanger Things, La Casa de Papel (Money Heist...great watch if you haven't), The Crown, Orange Is the New Black, & major films The Irishman (Scorsese, De Niro, Pacino, Lawrence Smith) & 6 Underground (Michael Bay, Ryan Reynolds)," J.P. Morgan analyst Doug Anmuth said. "NFLX continues to expect more net adds in '19 than in '18, which suggests at least 9.3M globally in 4Q based on the 3Q guide. It may not be easy, but we believe it's achievable given the slate & shift of marketing spend into 2H."
He added that increased penetration into emerging markets like India through mobile streaming is an undervalued opportunity as the company creates original content aimed at the region.
"We expect NFLX to continue to benefit from the global proliferation of Internet-connected devices and increasing consumer preference for on-demand video consumption over the Internet, with NFLX on its way toward 200M+ paid global subs by 2021," Anmuth added. "We believe NFLX has considerable leverage in its model as higher subs have a disproportionately larger impact on profit against relatively fixed content costs."
He set a $425 price target for the stock, over $100 north of its opening price on Thursday.
Of course the cost of pursuing more original content and expansion into more markets as competitors like Disney (DIS) come into view, and traditional networks like CBS (CBS) and NBC pull some of the most popular content from the platform in its largest market, remains a key risk.
"We expect content spending to trigger substantial cash burn for many years; notwithstanding four Netflix price increases in the last five years, cash burn continues to grow," Wedbush analyst Michael Pachter commented in a contrarian view to Kraft's. "Content migration and price hikes could cause a deceleration in subscriber growth, and consistently negative FCF makes DCF valuation impossible."
He noted that AT&T's (T) HBO and Comcast (CMCSA) are larger risks than his more bullish peers propose and could significantly curtail the all-important subscriber growth figures moving forward and keep pricing power in check.
The revenue per user and the ability to carry consumers in a new era of increased choice appears to be the main sticking point, with bears indicating continued erosion and bulls suggesting the ship remains seaworthy amidst the waves of competition and climbing debt.
"We expect continued strong ARPU growth, see continued leverage of content spend and marketing in 2020," Morgan Stanley analyst Benjamin Swinburne said. "On FCF, we note that content obligations fell from 1Q to 2Q as the transition from licensed to self-produced continues, reinforcing our view that FCF burn should moderate meaningfully in 2020."
"Ultimately, we think it is more likely than not that this year proves to be another year of record net additions AND nearly double digit ARPU growth," he added to his note, imploring clients to observe the buying opportunity. "In terms of risk/reward, in the last two years shares have traded between 6-11x EV/sales. At hypothetical trough revenue multiples, this would imply downside to roughly $300/share on our base case 2020E revenues, with significant upside to our $450 price target."
If investors are buying the base or bull case that Swinburne is promoting, it could be a key time to strike.