Netfix (NFLX) surged 7.38% ($32.50) to reach $473.10, following an upgrade from “Neutral” to “Buy” by Goldman Sachs Group (GS) analyst Heath Terry. Goldman also beefed up its 12-month price target to $590.0 million from $380.0 million.
The company hit a 52-week high of $473.68 on July 1, 2014. The year-to-date return was 30.4% while the S& P 500 jumped 7.7% during the same period.
Per Goldman, Netflix has the potential to more than double its global subscriber base over the next three years as it continues with its international expansion initiatives. Netflix’s addressable subscriber base is expected to touch around 207 million by 2017.
Terry further believes that the content for kids holds immense growth. Netflix itself recognizes the fact that kids make up a significant chunk of TV show and film viewers. To capitalize on this, the company had launched its exclusive Internet video streaming service, Just For Kids way back in 2011.
Further, to attract kids the company is also working with DreamWorks to bring original cartoon series to the service and has a similar deal in place with Mattel.
Additionally, Terry also raised 2014-2016 revenue and EPS guidance by 6.0% and 7.0%, respectively, to reflect significant growth in international subscribers as well as increase in average revenue per user in the U.S.
We believe that the upgrade is a positive for Netflix as it will strengthen investor confidence, especially at a time when the company is pursuing international expansion.
Rising content cost and increase in expenditure on account of international expansion remain near-term headwinds. Moreover, intensifying competition from Amazon.com (AMZN), Hulu and Time Warner’s (TWX) HBO is also a major concern for the company.
Nevertheless, Netflix’s recent price increases (for both domestic and international new users) will help the company to offset these higher expenses. Moreover, the company’s ever-expanding content portfolio and focus on improving customer engagement will continue to boost subscriber base.
Currently, Netflix has a Zacks Rank #3 (Hold).
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