Netflix, Inc. (NASDAQ:NFLX) reported its first quarter earnings on Wednesday, which indicated a strong subscriber growth, but less than expected revenues and earnings per share. In spite of Netflix, Inc. (NASDAQ:NFLX)’s miss on earnings numbers, investors responded kindly to the stock on after hours, which pushed the stock up by around 13% to $534 per share. Netflix, Inc. (NASDAQ:NFLX) has recently received a lot of upgrades and increased price targets from many analysts, but Wedbush Securities Managing Director, Michael Pachter is not ready to upgrade Netflix, Inc. (NASDAQ:NFLX) stock from a ‘Sell’ rating which he currently has on the stock. Pachter’s firm currently has a price target of $245 on the stock. Pachter talked on CNBC about the reasons behind his decision to not upgrade Netflix stock.
Why Pachter has decided not to upgrade Netflix stock inspite of the surge that the stock experience post its earnings report on Wednesday? Pachter said that he is valuing the company on fundamentals. He pointed at panelists comments about Netflix stock that story underneath is not related to fundamentals but is strongly dependent on the subscriber growth only. He feels that investors are completely unconcerned about profits or cash flow and care only about subscribers. He said that if Netflix keeps growing at 4.9 million subscribers every quarter, they might take over the world.
Pachter said that it is inevitable that Netflix has to raise the price at some point and he feels that the company will thrive at that time. He said that his only problem is valuing the company fundamentally. He feels that once Netflix decide to bump up the subscription fee in order to make profits, they might attract competition, which might work against them.
“I just have a problem fundamentally valuing the company, because once they do raise price and once they do start making a ton of money, the question is will they attract competition at lower prices and will they seize growing? I think [..] the raised price to $15 over the next 5 years, I think they will pop out to 60 or 70 or 80 million subscribers and then they won’t grow and they will be solely profitable with no growth, which means you will pay much more modest multiple than a 126 times,” Pachter said about Netflix.
Pachter said that cord cutting is never a problem, he feels that cord shaving and cord never is the problem that the cable companies are facing currently. Cord shaving means the people who currently use cable with high subscription would trim down to a basic level and use Netflix or HBO services to watch their favorite shows. Cord never means the people (especially young people) who never wanted to get a cable connection and always prefer a streaming service like Netflix of HBO Now.
What should Netflix do for Pachter to increase his price target and upgrade the stock?
“One thing, cash flow positive,” Pachter response to the question.
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