Netflix shares closed up 7.4% Tuesday to an all-time high of $473.10 after a Goldman Sachs analyst upgraded the stock, citing the company’s long-term international growth prospects and its stepped-up investments in kids’ programming.
In a research note, Goldman Sachs managing director of Internet equity research Heath Terry said Netflix could reach 62 million international subs by 2017 — up more than five times from 10.9 million non-U.S. subs at the end of 2013 — with margins exceeding 20%.
Netflix’s stock has historically been volatile, increasing fourfold over the course of 2013. For 2014 to date, shares are up 29%.
The addressable base of households for Netflix is expected to grow 51% this year, driven by six new markets in Europe: Germany, France, Luxembourg, Belgium, Austria and Switzerland. Terry predicted those would be followed by Spain, Poland, Italy and Portugal in 2015; Australia and New Zealand in 2016; and South Korea in 2017 with other Asian countries to come beyond that. By 2017, the analyst estimated that Netflix’s addressable audience of subscribers will more than double to 207 million.
“While most estimates of Netflix’s subscriber opportunity focus on broadband households, we believe this will increasingly understate the size of the market as more content is consumed through the growing ecosystem of connected devices and off wired networks,” the analyst wrote.
Terry raised his rating on Netflix, from “hold” to “buy,” and increased his 12-month price target on the stock from $380 to $590.
The Goldman analyst also pointed to Netflix’s significant investment in kids’ content, particularly after the streamer lost rights to Nickelodeon programming in 2013. Netflix has a broad deal with DreamWorks Animation encompassing 300 hours of programming, including the series “Turbo FAST” and new seasons of “DreamWorks Dragons,” and a licensing agreement with Disney, under which Netflix will get pay-TV window rights to future theatrical releases from Pixar and Disney Animation starting in 2016.
“We believe that households with children represent the most likely use case for Netflix’s multi-stream plans,” Terry wrote. “Further, we find that while other competitors, including Amazon, are also investing in the kids opportunity, Netflix’s competitive advantage is its wide selection, ease of use, quality of current content, and investment in originals.”
Terry compared Netflix’s financial prospects to HBO. Based on the premium cabler’s financials, if Netflix reaches a similar scale the company’s 2018 revenue could hit $14 billion with 48% operating margins. “While this is certainly overly optimistic given that it implies Netflix can achieve the same level of content leverage internationally that HBO has achieved in the U.S., it provides some sense of the range of outcomes possible as the company scales,” Terry wrote.
During the first quarter of 2014, Netflix added 2.25 million streaming subs in the U.S., in line with its previous guidance, and 1.75 million internationally (vs. previous expectations of 1.6 million). It ended the period with 35.67 million in the U.S. and 12.68 million internationally (for 48.35 million total worldwide).
Netflix is scheduled to report second-quarter 2014 results on July 21, after market close.