Goldman Sachs Adds Netflix To 'Conviction Buy' List

Netflix, Inc. NFLX led the market higher on Friday morning after one Wall Street firm added the stock to its list of top stocks to buy.

The Analyst

Goldman Sachs analyst Heath Terry reiterated his Buy rating and $400 price target for Netflix and added the stock to Goldman’s "Conviction Buy" list.

The Thesis

A late-year sell-off in the second half of 2018 has made Netflix one of the most compelling risk-reward opportunities in the entire tech sector. Terry said Goldman expects Netflix’s aggressive investments in content and international expansion will continue to generate subscriber growth beats in coming quarters, a recipe for a higher share price for investors.

“While we also believe that these investments and the associated cash burn (roughly $3bn in 2019E) will require it to return to the HY debt market over the next 3 years, we see a path for Netflix to both double its annual content investment and generate positive cash returns by 2022 while improving leverage and interest coverage ratios vs. 2018, as the company begins to fully amortize owned Originals,” Terry wrote in Friday's note.

In addition to global expansion, Terry said Netflix still has room for growth in relatively high penetrated markets, such as North America and Europe, where average revenue per user is much higher than in other markets. For example, Goldman found Netflix app downloads reached an all-time high in the U.S. in December despite the company’s greater than 50 percent penetration rate of U.S. households.

Price Action

Netflix shares traded higher by 6 percent to $287.69 Friday morning.

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Photo courtesy of Netflix.