High Concerns In Netflix Reduce Risk; It May Be Time To Buy

Pacific Crest recommends buying Netflix, Inc. NFLX, as concerns over the streaming service missing its second-quarter domestic subscriber guidance "creates an attractive opportunity to purchase a business that is in the early stages of an unprecedented global expansion."

Concerns May Open Entry Point

Netflix's aggressive shift to full-global distribution has fueled uncertainty that is currently heightened by concerns about second-quarter domestic subscribers and full-year international subscribers.

"We believe this concern is overdone. We have seen nothing to suggest a material change in the pace of domestic sub growth, and believe international sub growth will reaccelerate in Q3 following a Q2 that is likely impacted by seasonality and elevated churn following the global launch in Q1," analyst Andy Hargreaves wrote in a note.

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Netflix sees second-quarter domestic net additions of 500,000. For the third quarter, the sell-side expectations for domestic net additions stands at 782,000. Pacific Crest projects 750,000, which is roughly in line with sell-side consensus.

Rating And Justification

Hargreaves, who maintained Overweight rating and $130 price target on the stock, said international subscriber estimates assume a sharp reversal in adoption trends. The analyst believes the current consensus estimate for 13 million international net additions in 2016 assumes the lowest level of incremental adoption on record in targeted markets.

"It would also mark a sharp reversal from what we believe has been accelerating adoption in the past four years, which suggests consensus is likely conservative," Hargreaves highlighted.

The analyst recalled that six of the 20 largest one-day declines in NFLX since 2010 have happened in the last 12 months, the period of Netflix's most aggressive international expansion.

The analyst said the stock currently trades only modestly above his fair value estimate for the U.S. business of $80, which is based on a 0.9x PEG ratio and a pro-rata assignment of operating expenses.

"We see upside in the next year to our $130 DCF-based price target, with the potential for solid execution to drive longer-term upside well beyond that," Hargreaves added.

At time of writing, shares of Netflix were up 3.89 percent at $91.39.