Netflix’s stock defied the broader market malaise, riding out January to an all-time high — helped by a reversal on the company’s international growth prospects by Morgan Stanley analysts.
“We thought Netflix would enter a period of slowing U.S. sub growth before international users could offset the slowdown. We were wrong,” wrote Morgan Stanley analysts Scott Devitt and John Egbert in a research note.
The analysts upgraded their rating on Netflix from “underweight” to “equal weight,” and boosted 12-month share price target to $440, up from $310 previously. They revised their forecast after Netflix reported Q4 2013 results that beat Wall Street expectations, and issued upbeat guidance for the first three months of this year.
“We believe the current stock momentum should continue until the global subscriber trajectory moderates,” Scott Devitt and John Egbert wrote. The analysts had downgraded Netflix Jan. 7, citing increased competition domestically, sending Netflix shares down as much as 5%.
Also Friday, credit-rating service Moody’s Investors Service raised the rating outlook for about $500 million in debt held by Netflix, from “stable” to “positive.”
Another potential positive for Netflix’s stock: Amazon.com on Thursday said it was considering raising the price of Prime, the free-shipping program that includes access to the Prime Instant Video streaming service, by $20 to $40 — an increase of 25% to 50%.
With the renewed optimism, Netflix shares climbed up 1.2% for the day, closing at an all-time high $409.33 per share. Netflix’s new heights come amid a bummer of a January across the broader market. On Friday, the Dow Jones Industrial Average fell 0.94%, down about 150 points — and was down and 4.5% for the month, marking the biggest January drop since 2009.
In announcing fourth-quarter 2013 earnings last week, Netflix announced plans for a “substantial” expansion in Europe, with speculation centering on 2014 launches in France and Germany. The No. 1 streaming service added 2.3 million U.S. streaming subs and 1.7 million international customers. For the current quarter, Netflix forecast 2.25 million net new subscribers in the U.S. and 1.6 million overseas.
In their note Friday, the Morgan Stanley analysts wrote, “We acknowledge our underestimation of the international opportunity, especially given plans for further expansion.” Netflix’s Euro launch likely includes Germany, France, Spain and Italy, which in aggregate represent an opportunity nearly the size of the U.S., Devitt and Egbert wrote.
The analysts substantially upped their forecast for Netflix international subs. They now project overseas net adds of 5.99 million for 2014 (up from 4.26 million previously) and 6.65 million for 2015 (up from 4.92 million). Morgan Stanley also raised estimates on net adds for the U.S. streaming service to 5.48 million this year (from 5.23 million previously) and 3.89 million in 2015 (versus 3.08 million before).
Meanwhile, Moody’s affirmed the “Ba3″ rating on Netflix’s credit, which is in the “junk” category. The credit-ratings firm said the change was driven by Netflix’s strong operating performance over the last 12 months, “coupled with expectations for continued steady growth in subscribers and improvement in credit metrics over the forward rating horizon.”
However, Moody’s also noted that Netflix’s long-term business prospects “still are up against significant present and future competition threats, especially in light of low entry barriers, which could challenge the company’s subscriber growth and result in higher content and marketing costs and lower profitability.”