When the broader market recently plummeted on fears of a trade war with China, even highflier Netflix (NASDAQ: NFLX) wasn't spared. The streaming giant, which has been one of the hottest stocks around over the last several years, dropped more than 6% on June 25, marking its worst one-day performance since July 2016.
Yet the stock rebounded nearly 4% the following day, closing just under $400, as analysts continue to raise their price targets in anticipation of increased adoption in the U.S. and strong international growth. Analysts have been sharpening their pencils to justify -- or increase -- their price targets, as we get closer to Netflix's next quarterly earnings report, scheduled for July 16.
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Let's take a look at their logic.
U.S. growth may be slowing, but it isn't over
In a note to clients, Bernstein analyst Todd Juenger, who maintained his price target at $372, makes a compelling case that while growth is slowing, Netflix still has a significant runway ahead in the U.S. Many investors have been concerned about looming saturation in the domestic market, as growth has slowed to about 10% year over year in recent quarters. Juenger argues that even in light of that slower trajectory, in the coming decade, Netflix domestic subscribers should climb to 90 million.
He points out that younger customers subscribe to the streaming service at higher levels. As consumers age, carrying those higher rates with them, the overall penetration will grow. "As penetration rates increase among each current age cohort, the math on the potential increase as they age becomes that much higher, because you are carrying a higher penetration rate forward as time progresses," Juenger says.
"The new king of all media"
Bank of America Merrill Lynch raised its price target to $460 from its previous level of $352. Analyst Nat Schindler expects that Netflix will nearly triple its current subscriber count from 125 million to 360 million by 2030, which could be achieved with just 8% growth annually over the next dozen years.
In a note to clients titled "Still more upside for the new king of all media," Schindler wrote, "We think Netflix can become the dominant streaming player in virtually all markets given its content scale, despite varying levels of competition, regulation, and economic conditions in each market." He continued by saying the company's growing original-content library was an increasingly important asset, and provided the company with "longer-term pricing power."
The highest estimate on The Street
Not to be outdone, Imperial Capital Managing Director David Miller initiated coverage on Netflix with an outperform rating (essentially a "buy"), with a price target of $503 -- the highest among Wall Street analysts. He believes that Netflix's lowest monthly price ($7.99, which lets you watch on just one screen at a time and doesn't include HD) is the company's secret weapon, providing significant value to subscribers. "In our view, the greatest competitive advantage Netflix has as it seeks to grow subscribers from current levels is its pricing structure, and the value the consumer receives for that structure," Miller said. He also brushed off worries about competition.
You have to think long term
Netflix expects to add 6.2 million net new subscribers in the second quarter and forecasts revenue growth of 41% year over year. The company also expects net income to grow fivefold compared to the same period last year. If this comes to pass, the company will produce operating margins of nearly 12%, more than double the level achieved in the prior-year quarter.
It's important to note that Netflix stock has already had a spectacular run, gaining 150% over the previous 12 months, and more than 300% in just three years. The company is expensive by any valuation metric you care to use -- with a trailing 12-month P/E of 270, and an only slightly more reasonable forward valuation of 140.
While I'm a Netflix bull through and through, I think investors should be cautious going into the company's earnings report if they have anything other than a long-term investing horizon. While Netflix could well achieve its lofty goals, any miss -- particularly related to subscriber growth -- and fair-weather investors could run for the exits. Over the longer term, however, the rest of us should be just fine.
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