Why Netflix Has Too Many Variables To Make It A Straight Buy

• Shares of Netflix, Inc. NFLX were higher by nearly 4 percent Wednesday as investors shrugged off a cautious report by analysts at Macquarie.
• Analysts note that Netflix could achieve over 81 million subscribers by the end of 2018, or 10 percent of the total addressable market.
• However, various scenarios and assumptions involving content costs results in a large range of earnings per share estimates for 2018.

In a report published Wednesday, Macquarie Research analyst Tim Nollen maintained a Neutral rating on shares of Netflix with an unchanged $113 price target as there are too many variables between now and 2018 to become constructive on the stock.

Nollen said Netflix's content costs have "risen sharply" over the past two years with its total obligations up 58 percent from June 2013 to June 2015, while its total revenue over the same time period has only risen 54 percent. As such, it is prudent to assume that costs will continue rising moving forward, particularly in the international segment.

Nollen estimates that Netflix could achieve over 81 million international subscribers by the end of 2018 (10 percent of the total addressable broadband market). However, the analyst is also estimating that the company's international content costs will "pop" from just under $1 billion in 2014 to $5.5 billion in 2018.

Meanwhile, consensus estimates are calling for Netflix to count only 72 million international subscribers by 2018. Since Nollen's estimates are higher than the Street's, he applied various scenarios around both subscriber and content costs which yielded a range of earnings per share estimates for 2018 anywhere from an $0.18 loss to a profit of $6.37.

Bottom line, Nollen recognizes Netflix's growth potential, but there are "so many variables in the equation" to accurately build out a long-term model. In addition, the analyst pointed out that Netflix is likely to show negative earnings in the near-term as it "builds out its presence" into 2017 and beyond.