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3 Things Wall Street Loves About Netflix

By Rich Smith – Nov 21, 2016 at 11:19AM

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This analyst believes Netflix can't be stopped. Is it right?

Wall Street analyst looks out 15 years, sees Netflix as "unstoppable."

Netflix (NFLX 1.93%) stock soared 20% in a day last month after reporting third-quarter earnings. The company added 370,000 new subscribers to its rolls here in the U.S., and 3.2 million abroad, all while earning $0.07 per share -- $0.02 more than Wall Street expected. And yet, despite all this good news, Netflix stock has actually lost 8% of its value over the past year, and underperformed the S&P 500.

How much longer will Netflix continue to underperform? That's hard to say. But if you take an extremely long view, says one analyst, the end of this movie is clear: Netflix will utterly dominate the global game of internet television, trumping all comers, and earning profits several dozens of times larger than what Netflix earns today.

Here are three things you need to know about that.

Could Netflix stock be worth $145 a share? Stranger things have happened. Image source: Netflix.

1. What Brean Murray said 

This morning, analysts at Brean Murray (CAPS rating: 75.95) announced they are initiating coverage of Netflix stock with a buy rating and a $145 price target. With Netflix currently trading at just $118 and change, that implies a potential upside of 22% for new buyers of the stock -- enough to more than close the gap between Netflix and the S&P and make this stock an outperformer once again.

2. "an unstoppable lead"

In a quote on this morning, that's how Brean Murray summed up its buy thesis on Netflix: The company "has created an unstoppable lead in the internet TV business." Despite challenges from the big cable networks with their on-demand TV options, and even from (AMZN 1.75%) with its Prime Video service, Netflix "is positioned to dominate the business long term." 

Why? Brean Murray explains that Netflix "is on a path to become the largest spender on entertainment content" globally. Granted, on the one hand, this is leading to "losses" in the company's business internationally, while dragging down profits domestically. But at the same time, it is "creating a content moat" that Netflix can amortize "over a global direct-to-consumer audience" that will one day number in the hundreds of millions. If Netflix gets as big as Brean Murray believes it will become, the stock could become "the low cost producer" of internet content internationally, despite spending more than anyone else -- simply because it will be selling its content to such a vastly bigger audience than anyone else has.

3. Crunching the numbers

Brean Murray takes an exceptionally long view in coming to this conclusion. Whereas much of Wall Street is focused on stocks' quarter-to-quarter performance, Brean Murray argues that if you look out 15 years or so, it's likely that Netflix will eventually build an audience of 300 million subscribers worldwide.

Brean assumes Netflix will bring in an average of $19 a month from each such subscriber (that's $68.4 billion in annual revenue). The analyst further posits a "29% EBIT margin" earned on that revenue (so $19.8 billion in pre-tax profits, or roughly $46 a share based on Netflix's current share count). Down on the bottom line, after subtracting interest costs and taxes, Brean predicts this will work out to $25 in earnings per share.

Final thing: Time is money

When you consider that right now, Netflix is earning about 37 cents per share, the prospect of 25 dollars in per share earnings probably sounds pretty good. If Netflix was earning those profits today, in fact, the stock would have a P/E ratio of less than 5, and clearly be a bargain.

Unfortunately, Brean Murray isn't promising us those profits this year, or even next year, but 15 years from now -- 2031. And even for investors used to valuing stocks based on what they have earned over the past year, what they'll earn this year, or maybe what they might earn next year, it's hard to know how much to pay for earnings 15 years away.

Is 4.7 times fiscal 2031 earnings a good deal or a bad deal? I honestly don't know. Neither do I know whether Brean Murray is even right about its estimates. Will 15 years be enough time for rise to the challenge, and beat Netflix in the internet TV business? Will there even be an internet TV business in 15 years, or might we all be getting our TV from SpaceX's satellites? It's impossible to say.

What I do know is that right now, today, Netflix costs 320 times trailing earnings. And to me, that looks like an awful lot to pay for a stock.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 330 out of more than 75,000 rated members.

The Motley Fool owns shares of and recommends Netflix and We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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