What happened
Shares of Netflix (NFLX 2.38%) jumped on Tuesday following some positive analyst commentary. This move higher comes one day after Netflix stock suffered a steep drop, dragged lower by a market worried about an escalating trade war. At 3:35 p.m. EDT, Netflix stock was up about 4.1%. It was up as much as 5.3% earlier in the day.
So what
Analyst David Miller from Imperial Capital initiated coverage of Netflix on Wednesday with an "outperform" rating. Miller slapped a $503 price target on the stock, the highest so far. The stock currently sits right around $400 per share.
Image source: Netflix.
The reasoning behind the lofty price target involves pricing and operating leverage. Miller noted that Netflix's basic package, which does not include high-definition picture quality, is priced at just $7.99, lower than Amazon's video offering despite having more content. This implies that Netflix may be able to raise prices in the future without losing very many subscribers.
Miller also expects Netflix to be able to rein in its marketing and development spending, leading to operating leverage this year.
Now what
Netflix is an expensive stock, trading for hundreds of times earnings. The company expects its free cash flow to be a loss of between $3 billion and $4 billion this year as its debt-fueled content spending binge continues. The current stock price already reflects an awful lot of optimism, but Miller's price target goes well beyond that.
Could Netflix soar to $500 per share? Sure. But that move certainly wouldn't be based on the fundamentals.
