After being the top-performing stock in the entire S&P 500 in 2015, Netflix, Inc. NFLX is down 20.0 percent so far in 2016. According to Canaccord analyst Michael Graham, Netflix shareholders’ 2016 may be on the brink of a major turnaround.
Canaccord has initiated coverage on the streaming video giant with a Buy rating and a $120 price target. The firm’s positive outlook is based mostly on longer-term subscriber growth projections.
Graham said Q2 and Q3 subscriber growth and earnings are wildcards, but he anticipates strong subscriber growth will return by Q4. Once Netflix starts gaining significant international subscriber growth, the stock’s bull case will be all about content cost. Graham believes Netflix’s massive bet on original content will prove to be a profitable decision in the long run.
“With the benefit of data-driven selection processes and enough revenue to reinvest in originally-produced content at a cost of ~$2.5 million per programming hour, we expect the company will compete largely on the strength of its original content over time,” Graham explained.
He estimates the benefits of reducing licensing fees could ultimately provide as much as a 5 percent boost to the company’s gross margin leverage.
The firm’s $120 price target is based on 20x its projected 2020 EPS of $4.56.
Disclosure: The author holds no position in the stocks mentioned.
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