Deutsche Bank Upgrades Netflix To Buy Ahead Of Earnings

Deutsche Bank downgraded Netflix, Inc. NFLX's stock from a bullish stance last July, but now sees eight reasons to recommend buying the stock.

The Analyst

Deutsche Bank's Bryan Kraft upgraded Netflix from Hold to Buy with a 12-month price target lifted from $360 to $400.

The Thesis

Kraft's upgrade of Netflix's stock is based on several key points.

The Street's international paid subscriber estimates of 24.4 million for 2019-2020 and 24.8 million net additions look conservative versus Deutsche's estimates of 27.4 million and 27.5 million, respectively.

Netflix's stock is trading at 7.9 times EV/2019 sales which looks attractive. The research firm's new $400 price target is based on 7.3 times 2020 estimated sales which is in-line with a three-year median multiple.

Netflix appears to be transitioning away from an "application" towards a "platform" which offers network effects that peers can't duplicate.

Netflix's "appetite for high-value original content" can grow as it is winning the ongoing battle for talent. Management could improve the efficiency and effectiveness of how it spends on content as the company "matures as a studio."

Netflix can alter its business model in countries with low GDP per capita by offering less expensive tiered memberships with limited features. The era of Netflix relying on licensed content likely passed as non-original licensed content as a percentage of the catalog is now likely 25 percent or less.

Finally, the new competitive threat posed by Walt Disney Co DIS appears "exaggerated." The notion that consumers will cancel their Netflix subscription in favor of Disney+ is "unrealistic" given Netflix's portfolio of content that satisfies many more tastes and genres.

Price Action

Netflix's stock was trading higher by 1.5 percent at $354.25 per share Tuesday morning.

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