Netflix To Remain A Growth Story Through 2020

Bryan Kraft of Deutsche Bank initiated coverage of Netflix, Inc. NFLX with a Sell rating and $90 price target on October 9 on the belief that Netflix's stock is two years ahead of its fundamentals. However, the analyst updated his outlook on the stock Thursday by upgrading the rating to Hold with a price target boosted to $110.

Kraft stated that his outlook now reflects a higher return on Netflix's planned content investments based on international strength in the company's original content including "Luke Cage," "The Crown," "Gilmore Girls," and "Fuller House."

Accordingly, the analyst revised his fourth quarter international Paid Net Adds to 4.35 million, which is higher than the company's own guidance of 3.35 million. Kraft's full fiscal year 2017 Paid Net Add forecast was also boosted by 3.4 million users to 14.9 million.

Moving forward to 2018, the analyst sees Netflix's international Paid Subscriber total to reach 71 million, eight million higher than what he previously forecasted.

Kraft also noted that there is no change to his domestic outlook.

Despite Kraft's improved international outlook. Netflix's stock should be valued based on a market-based valuation framework over a ten-year period as opposed to a "random multiple approach."

"We are forecasting NFLX to reach a $318 stock price in 2026, at which time it would be trading at 18x 2026 unlevered FCF and 4.1x sales, vs 5.2x sales today," the analyst explained. "This implies a compounded return of ~10% annually over the next ten years."

The analyst expanded that given the higher risks associated with Netflix's international business and the stock's volatility, a 12.5 percent cost of equity should be used, which is higher than the expected 10-year return. Through 2020 Kraft is expecting minimal valuation support from profit metrics and with that said the stock will remain a growth story supported by subscriber momentum and EV/Sales.