Netflix Price Target Raised To $130 At Morgan Stanley Following $20 Climb

Morgan Stanley raised the price target on Netflix, Inc. NFLX by $20 to $130 after the company’s better-than-expected international subscription growth led to a strong third quarter.

Investors too cheered the results as the shares surged $20 in the pre-market hours Tuesday to $119.32.

“The power of originals in driving 3Q customer growth, and the fading churn impact from price increases support our view articulated when defending shares after the 2Q shortfall. Specifically, that — 1) over time all markets scale, and 2) that elevated churn from raising prices was temporary,” lead analyst Benjamin Swinburne wrote in a note.

A Global Look

The biggest positive surprise came from international net adds, which came in at +3.2 million versus guidance of 2 million and third quarter 2015 of +2.74 million, and the growth was driven increasingly by originals.

As a result, Swinburne raised his international net adds estimate (+13.2 million in 2017 vs. +11.4 million prior), which drives higher long-term earnings.

“We continue to feel that the opportunity for sub growth in 17 vs. expectations is materially improved from this point last year, and that the tailwinds including a favorable churn comp, moving to 1,000 hours of originals, a full year of Disney films in the US, and greater set-top distribution from cable giants Comcast and Liberty Global leave an attractive risk/reward,” Swinburne highlighted.

Related Link: Netflix To Continue Growth With $1 Billion More Content In 2017

In addition, the fourth-quarter guidance for both domestic and int'l subscriber growth was ahead of expectations, suggesting that the churn from price increases in the US is fading and company is benefiting from localization of content in the rest-of-world markets.

In particular, the analyst mentioned France, Germany, Switzerland, Belgium and Austria as high potential markets, with the current penetration below 10 percent.

“If these markets accelerate meaningfully, it brings the bull case back into focus. For now, we continue to assume int'L margins remain permanently below US margins,” Swinburne noted.

Meanwhile, the analyst now forecast $1.5 billion free cash flow burn in 2016, and similar levels in 2017 and the outlook for positive FCF remains “far in the distance.” Another concern is that the intl. business is unlikely to be profitable on an EBITDA basis for several more years.

However, Swinburne maintains his Overweight rating on the stock, which closed Monday’s trading at $99.80.

Full ratings data available on Benzinga Pro.