Netflix (NASDAQ:NFLX) stock is truly firing on all cylinders, rising by more than 70% in the last year and trading all-time highs on the back of spectacular financial performance and soaring investor optimism. However, investment decisions need to be based on future potential, not on past performance. The main question for investors is whether Netflix still offers enough room for gains, or if the best is already in the past for investors in Netflix stock.
You can count FRB Capital on the bullish side, as the research company has recently upgraded Netflix to outperform, with an ambitious price target of $900 per share. This would imply a big upside potential of nearly 60% from current levels.
Wall Street forecasts and price targets are always subject to errors and revisions, so investors need to take these numbers with a grain of salt. It's important to always do your own homework when analyzing investment decisions. On the other hand, you can many times gain valuable insights from Wall Street research.
The Netflix $900 thesis
FRB Capital is relying on a proprietary survey across 2,000 consumers in the U.S. saying that domestic Netflix subscribers, which represent nearly 40% of households in the U.S., like the service more than traditional T.V. Netflix's blockbuster earnings report for the first quarter of 2015 provides additional confidence to FRB Capital on its optimistic view of the business.
The research firm believes Netflix could reach 180 million global subscribers by 2020, with more than 60 million of those members coming from the U.S. The analysts at FRB capital estimate that Netflix can also deliver average revenue per user growth in the mid-single-digits or more, which could allow Netflix to generate a contribution margin of more than 40% by 2020.
Under these assumptions, a discounted cash flow analysis of Netflix's business in the U.S. yields an estimated value of $300 per share. FRB Capital believes the international market opportunity could be nearly six times the size of the U.S., although it would obviously take considerable time to capture it. FRB Capital believes the international market is worth nearly two times the U.S. market for Netflix, adding $600 to the valuation for an ultimate price target of $900 for Netflix stock.
Can Netflix deliver?
It's impossible to tell for certain what the future will bring, but we can take some clues from looking at current conditions and the main trends going forward. Netflix is the undisputed global leader in online streaming, and everything seems to be indicating that the company offers enormous room for expansion over the years ahead.
Netflix gained 4.88 million customers on a global basis during the first quarter of 2015, bringing the total membership base to a staggering 62.27 million. In spite of its size, growth is not slowing down; on the contrary, the numbers show an acceleration versus 4 million additions in the same quarter last year. Even if the U.S., which is the company's more mature market, Netflix gained 2.28 million members in the last quarter versus 2.25 million in the first quarter of 2014.
Member engagement is at all-time highs, as viewers streamed 10 billion hours of content during the last quarter. Netflix is not only gaining new members at an amazing speed, but those members also seem quite satisfied with the service. This provides validity to FRB Capital's thesis regarding to strong relationship Netflix has consolidated with its members.
On content as a competitive strength
The company has a pretty simple explanation for this success. As Netflix continues adding valuable content to its library, the customer proposition keeps getting better over time. Original content is especially important from this point of view, since it allows Netflix to differentiate the service and increase customer engagement while keeping costs under control.
According to management: "Our original content strategy is playing out as we hoped, driving lots of viewing in an economic way for Netflix while bolstering the positive perception of our brand and service around the world."
Competitive pressure is always a source of potential risk, especially now that Time Warner's (NYSE:TWX) HBO is entering the streaming market with HBO Now. However, Netflix is competitively priced at only $8.99 per month versus $14.99 monthly for HBO Now.
At these prices, both Netflix and HBO Now are far less expensive than traditional pay TV options. In fact, chances are that traditional TV players are the once who stand to lose the most from growing streaming variety, as more consumers will be turning to online TV over traditional options in the coming years.
Only time can tell for sure if Netflix stock can reach $900 per share. However, one thing looks quite clear, the online TV revolution is here to stay, and Netflix is both a major driver and arguably the biggest beneficiary from the online TV boom.
Andrés Cardenal owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. 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.