Netflix Has 'Unstoppable Lead' In Streaming TV, But Valuation Sends Loop Capital To Sideline

Netflix, Inc. NFLX has long been an investors' darling, given its dominant position in the streaming TV business. Loop Capital Markets bullishly estimates Netflix will have 300 million subscribers by 2025, but the firm initiated the stock with a neutral stance due to its valuation. 

The Analyst

Loop Capital Markets analyst Alan Gould initiated coverage of Netflix with a Hold rating and a $325 price target.

The Thesis

"Netflix is building a content moat and amortizing it over a global direct-to-consumer audience," Gould said in a Thursday note. The company boasts the largest subscriber base, allowing Netflix to spend on content and situate itself as the low-cost provider on a per-subscriber basis, the analyst said. 

The Loop analyst said Netflix has an "unstoppable lead" in the U.S. streaming TV business. 

Netflix has surpassed subscriber guidance in 14 of the past 17 quarters and the streak is likely to continue, Gould said. The analyst estimates that in two years, Netflix will spend $15 billion on entertainment content. Seven years from now, the streaming service will spend $25 billion annually on entertainment content, according to Loop projections. 

Netflix's content investment per subscriber is expected to peak in 2018 or 2019, with a front-end loaded investment to launch service in new markets likely to lead to accelerated profits, Gould said. 

Although the stock looks expensive through the lens of traditional metrics due to limited international contribution profits — and investment in original content — Gould said Netflix will reap rewards long-term. By 2025, Loop estimates Netflix will have over 300 million global paying subscribers that generate average revenue per user of $16.50, translating to revenue of $60 billion and a 23-percent CAGR.

Loop Capital's above-consensus subscriber forecasts are being countered by valuation concerns, as the stock has rallied about 66 percent in the first 11 weeks of the year.

" ... With a $144-billion market cap, and the stock up 66 percent in the first 11 weeks of the year, we find it hard to justify a bullish rating," Gould said. 

The Price Target

Netflix shares have more than doubled over the past year.

Netflix shares were up 0.21 percent at $321.76 in Friday morning trading. 

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Photo courtesy of Netflix.