Netflix: (NFLX: $103, up 7% since Thursday)
If you're willing to look out 3+ years, we think Netflix is one of the very few names in the large cap Internet universe that can be a double. Analysts are calling for EPS of $10 by 2020. A 20x multiple would get you to $200 a share. What is all the excitement about?
First, there is a major technological shift underway. The transformation from cable and standalone TVs to streaming content over connected devices is happening now. The living room of the future may have only a Netflix and/or HULU subscription with a few connected devices, and no TV or cable! Why is this happening? People love TV content, but they don't love the linear TV experience, where channels present programs only at particular times on non-portable screens with complicated remote controls and tons of commercials. Now Internet TV - which is on-demand, personalized, and available on any screen - is replacing the linear TV experience.
Second, there is upside to winning more share of leisure time. Netflix competes with all the activities that consumers have at their disposal in their leisure time. This includes watching content on other streaming services, cable TV, watching DVDs, but also reading a book, surfing YouTube, playing video games, socializing on Facebook, going out to dinner with friends, and enjoying a glass of wine, to name a few. Netflix currently earns a tiny fraction of consumers’ time and money, and has lots of opportunity to win a larger share, if the business can keep improving.
Third, exclusive content is building. One key driver for Netflix becoming a powerhouse is their focus on becoming a producer of content, that provides a high-quality, curated offering, and therefore has increasingly licensed content on an exclusive basis. Management is behind the effort in full force. Netflix’s new original - The Get Down, (a musical drama television series set in the South Bronx in the late 1970s, created by Baz Luhrmann, the director of Moulin Rouge, our favorite movie of all time) cost $10 million per episode! In 2016, Netflix expects to spend $6 billion on content for its members. SIX BILLION DOLLARS. In addition, Netflix will spend $1 billion on marketing in 2016, getting people so excited about the content that they pony up and join Netflix.
Fourth, the company is now a franchise with global scale. Last year Netflix launched in Australia, New Zealand, Japan, Spain, Italy and Portugal. In January, Netflix added an additional 130 countries, making Netflix available virtually everywhere in the world except for China and places where US companies are not allowed to operate (North Korea, Crimea, and Syria)
Fifth, the US market isn’t over yet. Netflix targets 60-90 million members in the US, based upon its trajectory to date and the continued growth of Internet TV. Currently, domestic subscribers total around 46 million.
The stock is still working to get the courage to retest 52 week highs ($133 in December). Last quarter’s performance didn’t help – they provided lower-than-expected subscriber growth guidance than some expected. We don’t see any reasons to be concerned. All signs show demand for Netflix's services remains robust. We see the current level as an opportunity to accumulate shares.
BMR Take: We admit that at a valuation of 100x earnings and 50x EBITDA there is a risk to any sharp near term hiccup in the business, or overall stock market. However, Netflix represents one of the more lucrative growth stock stories of a generation, and it isn’t over yet. The company is transforming our living room, a place where we spend a lot of time. $10 a month to Netflix and no cable bill is something that millions are willing and will be willing to spend for decades to come. Reiterate Buy.