Netflix (NASDAQ:NFLX) plans to announce the results of its second quarter after market close on Monday, July 16, and expectations are high going into the company's financial report. The stock has more than doubled so far this year, and there are many reasons to like the streaming giant.
It isn't unusual for analysts to hedge their bets ahead of a company's earnings, raising or lowering their estimates and making adjustments to their standing price targets. However, several analysts have made increasingly bullish calls on Netflix in the last week, driving the stock to all-time highs. Let's take a look at their reasons to get some insight into what to expect.
The low end
Piper Jaffray analyst Michael Olson recently raised his price target on Netflix to $420 from $367. Netflix closed Friday at $411. Olson and his team analyze search trends to determine consumer interest in the streaming service, with an eye toward estimating subscribers. Current data suggests the company will have "solid" subscriber gains, with domestic additions likely in line with expectations and greater potential for international gains. Olson believes there is a "high likelihood" of strong results overall.
Olson has been forecasting an international subscriber count of 73.3 million to end the second quarter, but his team's analysis of search trends suggests it could climb to as high as 77.3 million. For comparison, Netflix is guiding for 5 million new international subs, ending the quarter with 73.29 million -- and the company has a habit of exceeding its own expectations.
A little higher
Monness, Crespi, Hardt & Company analyst Brian White raised his expectations for Netflix, with a price target of $460 from $375. "Given Netflix's leadership position in the market, growing scale, rapid growth and subscription-based model, we believe investors will continue to pay a premium for the stock," he wrote.
Given that Netflix currently has a forward valuation of 140, that's a pretty safe bet, since investors are already paying a significant premium. That becomes only slightly more palatable when you realize that analysts are expecting Netflix's revenue to grow 38% in 2018, producing earnings per share of $2.86 -- up 129% over 2017.
A new high
Last week, Goldman Sachs analyst Terry Heath raised his target to a new high among analysts, to $490 from $390, saying, "We believe the growing content offering and expanding distribution ecosystem will continue to drive subscriber growth above consensus expectations." Heath believes Netflix's plan to spend another $2 billion on advertising this year will spur additional subscriber growth, and the fact that the company can expand its operating margin while spending more is a great sign.
With consumer favorites like Stranger Things, 13 Reasons Why, The Crown, and Unbreakable Kimmy Schmidt, Netflix's original content strategy is working, and has been cited as the primary reason for joining the service.
Not to be outdone...
Daniel Ives of GBH Insights upped his price target to a whopping $500, up from $400 -- and the highest among his Wall Street colleagues -- saying "Our bullish thesis on Netflix is based on our belief that the company's competitive moat, franchise appeal, ability to increase international streaming customers through 2020, and original content build out will translate into robust profitability and growth."
Ives also cites a survey conducted by GBH that indicates viewers watch 10 hours of Netflix per week, while customers of Amazon Prime and Hulu top out at five hours. The survey also shows that 90% of Netflix subscribers say they would be willing to pay more.
What the future looks like
Mark Mahaney of RBC Capital Markets has provided a much longer-term view than his peers. Over the next five years, Mahaney is forecasting that Netflix will grow its total subscribers to between 235 million and 265 million (compared to 125 million today), spurred by 70% penetration in the U.S. and 33% of international markets excluding China (among households with broadband).
He also believes that Netflix's average revenue per user will jump from $10.50 today to between $12 and $14. Using those assumptions, Mahaney expects earnings per share in a range of $18 to $25 by 2022 -- driving the stock price to as much as $750. On the low end, he sees the stock at $450, which isn't too much of a stretch, considering it's over $400 per share as of this writing.
Netflix has a trailing-12-month price-to-earnings ratio of 271 -- no, that isn't a typo. If there comes a time when Netflix fails to deliver on Wall Street's lofty expectations -- and that day will come -- the sell-off would be swift and brutal.
I think Netflix will eventually get to Mahaney's rosy scenario, and my money is where my mouth is -- Netflix is my biggest holding. I am also aware that it probably won't get there in a straight line. Let the buyer beware.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon and Netflix. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.