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Analysis: Why Netflix Remains 'Best Idea In The Media Industry'

Analysis: Why Netflix Remains 'Best Idea In The Media Industry'

Netflix, Inc. (NASDAQ: NFLX) has not only swept subscribers off their feet, but it has also enamored the analyst community.

Analysts from Guggenheim said in a note on Tuesday Netflix remains its best idea in the media industry, applauding its investments in compelling global content creation, its distribution model and its subscriber base.

Making Rational Investments

Analysts Michael Morris and Curry Baker believe Netflix is making rational investments in content, with the cash spend estimated for 2017 at $8 billion, and also technology. The analysts also think the company will reward investors, given its belief that the company's structural competitive advantage will yield significant and sustainable cash flow over the long term.


Clout Of Domestic Subscriber Base

From the 50.9 million domestic paying subscriber base in the first quarter, Guggenheim estimates growth to 62.5 million subscribers by the end of 2020, with expanded original content and pay-TV distribution partnership lending support.

The average age of Netflix's domestic subscriber base being less than the traditional television viewers, the firm sees potential in set-top box integration, which has improved the ease of use for older-skewing pay-TV subscribers.

This, according to the firm, has increased sign-up and engagement rates, and lower churn for subscribers joining through pay-TV platforms. The firm also believes the domestic pricing power has not been fully reflected in the consensus expectations for the company.

International Biz: Impactful Component Of Bull Thesis

The firm said international subscriber growth and cash flow potential remains the most impactful component of the bull thesis on Netflix. The firm's data showed that Netflix's 47.9 million international subscribers as of the first quarter represented 11-percent penetration of international broadband homes. Greater international broadband availability is also an opportunity, the firm added.

The firm also noted Netflix has seen improvement in customer engagement as localized content and language capabilities are added to the service.

Investor Concern Not a Concern

Guggenheim highlighted an investor concern that the allocation of programming expenses to nascent international markets creates an inaccurate picture of domestic profitability. However, the firm thinks the concern is offset by using cash flow or cash, rather than the book cost in its analysis and its belief that the opportunity presented by the global market is sufficiently large to justify the significant content investment.

"We believe that ultimately Netflix OIBDA margins will reach the low end of the cable network industry (27–46 percent margin in 2016) compared to their current 21 percent domestic and 5 percent overall," the firm said.

Raising Price Target

Guggenheim maintains its Buy rating on the shares of Netflix, and it raised its price target from $175 to $180, citing its greater confidence in the company's pricing power and subscriber growth potential based on its proprietary data referenced within.

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