Over the last three years Netflix, Inc. (NASDAQ:NFLX)‘s margins have doubled, increasing to 30% from 15%. According to the company’s latest earnings release, it signed up nearly five million new users during the past quarter. Its stock has gone up by almost 60% so far this year and its market cap is nearing $33 billion. Sheer momentum and gigantic user growth has made FBR Capital daydream that Netflix, Inc.’s stock could hit $900. On the other hand, Evercore ISI is maintaining its ‘Sell’ rating on the stock, saying a formidable opponent could end Netflix, Inc.’s dream run very easily. CNBC talked to Mark Mahaney to get sense of two completely opposite stock evaluations.
RBC Capital Markets, Mahaney’s firm, currently maintains a $600 price target for Netflix, Inc. Seeing its success in Canada and the U.K., RBC is hoping that Netflix, Inc.’s international expansion plans and its rapidly-growing paying user base will bring more value to its stock. However, Mahaney did not think Netflix, Inc.’s stock could meet FBR Capital’s predicted $900 price target in the short term.
“I don’t know about $900. I don’t know when. You know, if this company can do $50 in its long term earnings power; the market probably put 20 multiple on that. So, I’m not saying in the next twelve months but long term, there is pitch here for $1,000. […] If you go over a hundred million subscribers and you take margins to close to where HBO is today. Yeah, you get $50 an earnings,” Mahaney said.
On the other hand, Evercore ISI has once again recommended its ‘Sell’ rating for the video streaming company. Evercore ISI’s fears are that at some point in time Netflix, Inc. (NASDAQ:NFLX) will have to face competition and supposing a deeply pocketed, A Class competitor enters the video streaming space, the fortune of Netflix, Inc.’s stock will turn around dramatically.
“I agree if there is one big risk here, its not the streaming story, it’s not the current profitability of the model. It’s not the content cost or getting big enough that they can manage those content costs. It really is if there is a spoiler in the market. I don’t think that we have seen a spoiler yet. But if there is one, I think, it’s Amazon. Amazon is already out there in the market. If they were to launch a stand-alone service, in a typical Amazon fashion, at $5.99 a month; that would derail this stock. Other than that, other risks are there in terms of execution as well,” Mahaney said.
Netflix, Inc. (NASDAQ:NFLX) reported record subscriber growth in its earning call yesterday and it has a lot of premium content (some of that content is its own original content) that will attract more and more users to sign up to its paid streaming service. According to Mahaney, Netflix is giving people every reason to sign up and stay with its service. He insists the stock will keep jumping higher with international expansion and that only a formidable opponent in the video streaming space, such as Amazon.com, Inc. (NASDAQ:AMZN), could derail its stock.
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