Telecom M&A Poses No Near-Term Threat To Netflix, Says Bullish Pivotal Research

Even after rocketing up nearly 170 percent over the past year, Netflix, Inc. NFLX shares have room to grow — another 19 percent, according to Pivotal Research Group. 

The Analyst

Pivotal's Jeffrey Wlodarczak maintained a Buy rating on Netflix and raised the price target from $420 to $500.

The Thesis

Wlodarczak expects to see another strong result with Netflix's second-quarter report, expected expected July 16 after hours, with the drivers being strong content launches and aggressive marketing. (See the analyst's track record here.)

The key risks Wlodarczak noted are largely in line with the rest of Wall Street, including:

  • A need for continued strong subscriber growth demanded by the company’s large obligations to spend on content.
  • Significant volatility in the event of a subscriber miss.
  • The repeal of net neutrality rules.

Interestingly, the analyst does not see recent or upcoming mergers in the telecom and media sectors as threats, at least in the near-term. The AT&T Inc. TTime Warner TWX deal could be an opportunity for Netflix to scoop up some talent from the latter, and HBO will likely be weakened as AT&T struggles to blend its vastly different operating cultures, Wlodarczak said.

John Oliver, host of HBO’s popular “Last Week Tonight,” has frequently made jokes at AT&T’s expense in recent weeks, openly acknowledging that the telecom giant is his new parent company.

Eyeing the bidding war between Walt Disney Co DIS and Comcast Corporation CMCSA for most of Twenty-First Century Fox’s FOXA assets, Wlodarczak said it is clearly an attempt to compete with Netflix in the medium and long-term — but will “weaken” the winning bidder in the near-term.

On Wednesday, Fox announced that it would accept a new offer from Disney that is 35 percent higher than its previous bid, at $38 per share, and above Comcast’s latest offer. Comcast is rumored to be planning its next move and could counter with an offer as high as $41 per share.

Although the deal seems like a boon for either company, Wlodarczak reiterated that both Disney and Comcast are “constrained by their reliance on the current PayTV business and media investor focus on EBITDA and free cash flow,” which the analyst said will limit the amount they can spend on keeping up with Netflix.

“[Netflix] appears to operate in a virtuous cycle, as the larger their subscriber base grows, the more they can spend on original content, which increases the potential target market for their service and dramatically increases barriers to entry."

Price Action

Netflix shares were down more than 2 percent at $408.07 at the time of publication Thursday morning. 

Related Links:

Citron Says Netflix Bulls Need A 'Reality Check'

Goldman Sachs Raises Netflix Price Target To $490, Projects Positive Cash Flow By 2022

Photo courtesy of Netflix. 

Posted In: Citron ResearchJeffrey WlodarczakPivotal ResearchAnalyst ColorNewsShort SellersPrice TargetReiterationM&AAnalyst Ratings