Imperial Capital: 5 Reasons Why Netflix Still Has Runway Ahead

Netflix, Inc. NFLX boasts a simple business model of giving consumers the ability to watch what they want, when they want and how they want for a "mere" $7.99 a month. But investors assuming that the company's tremendous growth over the past year is unsustainable may want to reconsider, according to Imperial Capital.

The Analyst

Imperial Capital's David Miller initiated coverage of Netflix with an Outperform rating and $503 price target.

The Thesis

Netflix is the clear leader in the video-on-demand space, Miller said in a Tuesday note. 

The analyst gave five reasons why he believes Netflix's momentum can continue and stock price can appreciate: 

• Netflix's business is "much more of a supplemental service," as at least 63 percent of users also subscribe to another pay TV service.
• Consumers demand "great content" as opposed to "new" content, the analyst said. In other words, consumers are willing to watch interesting shows and movies regardless of their age, and Netflix's recommendation engine does a great job of satisfying this need.
• Few competitors threaten Netflix's dominance, Miller said. While many "detractors" cite growing competition as a reason to sell or short Netflix's stock, there's a complete absence of any similar service at the $7.99 monthly price point, the analyst said. The closest competitor, Amazon.com, Inc. AMZN, prices its streaming service 3.2-percent higher than Netflix, but has "substantially" less value, with fewer compelling shows and no traction in originals, Miller said. 
• Investors assuming that Netflix's stock performance in 2017 is due to the company's 25.4-percent year-over-year growth in global streaming subscribers are missing part of the picture, the analyst said. Throughout 2017, Netflix dropped multiple hints as to what its future operating leverage would look like, and investors saw a "taste of that" with EBIT rising 120.9 percent and EBITDA rising 103.1 percent, he said. The figures should rise even more in 2018, especially at a time when Netflix may no longer need to "spend so prodigiously" on marketing, technology and development, Miller said. 
• Finally, Netflix is unlikely to move into streaming sporting events. This is encouraging for three reasons, Miller said: the company won't put itself in a position where it needs to bid higher prices to win sporting rights from the current holder; Netflix's already very low monthly price would likely have to move higher to support sports livestreaming; there aren't enough sports in existence in order to properly substitute content. 

Price Action

Netflix shares were trading up more than 2 percent premarket Tuesday.

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Photo courtesy of Netflix.