What: Shares of Netflix (NFLX 1.58%) bucked the broad market trend on Tuesday, gaining 3% to close at $438.28, as Barclays raised its price target 13% to $450 from $400.
So what: Although the market reacted favorably to Barclays' updated price target, the broker spells out clearly that "with increased spending likely to continue to depress margins and our increased conviction on slowing U.S. subscribers we see limited upside to the stock at current levels." Moreover, "[our] scenario analysis suggests a fully valued stock."
Nevertheless, I think Barclays' base case scenario may well understate the potential for Netflix to compound business value -- particularly when one adopts a time horizon that stretches beyond that of Barclays' model (which establishes forecasts for 2018).
For example, Barclays estimates Netflix will have 52.5 subscribers million in 2018 (a 10.9% annualized growth rate) compared to Netflix's long-term view, which calls for total domestic subscriber count in a range of 60 million to 90 million. Similarly, Barclays has domestic contribution margin growing to 32.5% by 2018, whereas Netflix anticipates a contribution margin of "about 40%" by 2020. Indeed, Barclays says it has "increased conviction in NFLX's ability to raise ARPU (average revenue per user) domestically."
Now what: According to Barclays' base case, "given rich subscriber valuation and exorbitant content spend, we remain cautious on the name in the short to medium term." I think that's a legitimate assessment -- in the short to medium term.
Given Netflix's development stage and the industry in which it operates, it is extraordinarily difficult to pinpoint its intrinsic value with great accuracy. However, in the absence of evidence that the company is clearly overvalued, I'm inclined to give the shares the benefit of the doubt. For a genuine long-term investor with a minimum five-year time horizon, I think results will be quite satisfactory. Despite the uncertainty around any quantitative assessment of the stock, one of the qualitative factors that gives me the confidence to write that is the quality of the management -- Barron's recently named CEO Reed Hastings as one of the 30 best CEOs in the world, an accolade he fully deserves.
