Netflix, Inc. (NFLX) Draws a Price Target Jump; Here’s Why

SunTrust's Matthew Thornton now bets on 2% in upside potential for NFLX stock following the 4Q turnout.


Netflix, Inc. (NASDAQ:NFLX) has one analyst now recognizing more upside potential for the stock than downside risk following the video streaming giant’s fourth quarter show on January 22nd.

All the same, SunTrust analyst Matthew Thornton remains cautious, seeing only slight potential for gains from the sidelines.

With new model expectations following the print, the analyst reiterates a Hold rating on NFLX stock while hiking the price target from $175 to $270, which implies a 2% upside from current levels. (To watch Thornton’s track record, click here)

For the fourth quarter, NFLX released revenue that shot up 31% year-over-year (not factoring in foreign exchange impact) to $3.29 billion, soaring past the Street’s $3.28 billion; operating income of $245 million with a 7.5% margin against consensus of $243 million; and free cash flow around -$524 million, essentially aligning with the Street’s expectations.

For the first quarter, the NFLX team guided revenue to $3.69 billion, likewise beating out consensus of $3.49 billion, along with operating income of $362 million against consensus $395 million. For full-year 2018, NFLX calls for a 10% operating margin compared the Street’s 11.1%. Profit & loss content cost of $7.5 to $8.0 billion marks a boost from the prior outlook of $7.0 to $8.0 billion, with marketing spend rising from $1.3 billion last year to $2 billion for 2018. Moreover, NFLX is investing $1.3 billion in technology and development spend, with free cash flow expected to hit between around -$3 to -$4 billion, compared to the Street’s -$2.3 billion. As far as Thornton sees it, NFLX is “continuing to tap the high yield markets to bridge the original content funding gap.”

In reaction, Thornton is taking his 2018 expectations up, lifting GAAP revenue from $14.1 to $16.0 billion; EBIT from $1.43 to $1.64 billion; and EPS from $1.97 to $2.77 billion, attributing new confidence to a vault in subscribers, better average revenue per user (ARPU), and a lesser tax rate. Although, the analyst notes this is somewhat offset by more expensive marketing, T&D, and G&A expense.

Internationally, fourth quarter revenue rocketed 59% year-over-year (not including foreign exchange) to $1.55 billion, aligning with the Street’s $1.55 billion. Moreover, NFLX yielded 6.36 million in international net sub adds, trouncing the Street’s 5.10 million forecast. Contribution profit in this segment brought $135 million to the table and yielded an 8.7% margin compared to consensus of $117 million and a 7.5% margin. Here, Thornton attributes upside to timing of content spend. For the first quarter, the giant angles for 4.90 million in sub adds, also beating out the Street’s 3.74 million, and revenue of $1.78 billion flying above consensus of $1.66 billion. Additionally, NFLX looks for $234 million in contribution profit and a 13.1% margin for the first quarter of 2018 against consensus of $145 million and 8.7%- a nice outclass.

On the domestic front, revenue climbed 16% year-over-year to $1.63 billion just above consensus of $1.62 billion along with 1.98 million in net sub adds trouncing the Street’s 1.29 million. Contribution profit reached $561 million for the quarter and resulted in a 34.4% margin compared to consensus of $558 million and 34.4% margin expectations. Thornton attributes upside to an upturn in revenue. For the first quarter of 2018 in this segment, NFLX sets expectations for 1.45 million in sub adds, another outperformance against consensus of $!.28 million; $1.81 billion in revenue compared to the Street’s $1.75 billion; and $656 million in contribution profit with a 36.3% margin, which falls under the Street’s $691 million and 39.5% margin projections.

Other key elements of the results include a 9% step up in average streaming hours per membership for last year and an international original series content expansion plan- from around 8% last year to a whopping 30 slated for 2018.

“Interestingly, management noted that MVPD integrations seem to be helping penetrate later adopters, that Members through MVPD integrations tend to exhibit lower churn (given tie to video/ data/other bundles), and that MVPD bundles will grow in importance. Broadly speaking, partnerships have been a meaningful contributor, though not a dominant contributor,” writes Thornton.

Additionally, the analyst underscores, “Adjacent TAMs (e.g. merchandising, content licensing, box office participation, product placement) could be pursued only as they support/drive the core business, are unlikely to be big enough to warrant callouts/attention (at least through 2018), but carry optionality long-term (including in securing debt).”

TipRanks highlights a mostly bullish analyst consensus rating on NFLX stock. Based on 32 analysts polled in the last 3 months, 22 rate a Buy on NFLX, 9 maintain a Hold, while 1 issues a Sell on the stock’s opportunity. With a return potential of almost 4%, the 12-month average price target stands at $268.03, suggesting optimism is baked into expectations.