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Netflix (NFLX) Gets a Price-Target Boost Ahead of Earnings

Wells Fargo's Ken Sena now spotlights 10% in return potential for Netfix on back of stronger outer year expectations.


After conducting a new domestic survey, Wells Fargo analyst Ken Sena now has even more bullish expectations in store for Netflix (NASDAQ:NFLX) down the line. With the video streaming giant’s first quarter earnings for the year due this evening, Sena is encouraged on the company’s domestic momentum as well as pricing power potential overseas, dialing up out year expectations.

As such, the analyst reiterates an Overweight rating on NFLX stock while jumping the price target from $285 to $345, which implies a close to 10% upside from current levels. (To watch Sena’s track record, click here)

For the first quarter, Sena now angles for “modest upside potential on domestic and international subscribers. Sena’s expectations are more bullish than the Street, with the analyst calling for 1.55 million domestic net adds against the Street’s 1.48 million, and 4.94 million international net adds against the Street’s 4.9 million. This lifts Sena’s total revenue forecast to $3.72 billion, which would indicate a 41% year-over-year rise in growth.

Meanwhile, after polling 500 U.S. residents, Sena’s pricing survey exhibits half of these respondents are willing to shell out a higher, “and in some instances, a MUCH higher” price for Netflix- “particularly as this content gets continuously refined (i.e., NFLX has the data, the technology and increasingly the talent – think Ryan Murphy and Shonda Rhimes).”

On back of a “more constructive” stance on short-term subscriber adds coupled with longer-term pricing, the analyst now bumps up his total subscriber net add forecast for the second quarter from 5.2 million to 5.4 million. This surge in confidence is “entirely driven by domestic,” adds Sena, who is now 100,000 over the Street on both domestic and international, angling for 4.3 million net adds against the Street’s 4.2 million. Accordingly, the analyst now bets on $3.89 billion in total revenue, which suggests a 40% year-over-year surge, along with a 4% higher expectation for operating income of $408 million. Whereas total revenue for the second quarter aligns with the Street’s expectations, Sena’s operating income lands roughly $20 million ahead of the Street. For the full year of 2018, Sena now looks for a 36% year-over-year lift in revenue to $15.95 billion and for operating income to take an 11% slice of revenue at $1.68 billion.

Ultimately, “As we look out beyond 2018, we have increased our domestic streaming ARPU assumptions to now imply a 7% five-year CAGR (vs. 5% previously), which assumes the domestic streaming business can reach a nearly $15/month ARPU by 2023 (while we have baked in a more modest 50bp lift to our five-year international streaming ARPU CAGR assumptions). Finally, flowing these higher pricing assumptions and modestly higher subscriber estimates through the remainder of our model, including extrapolating over a 15-year DCF model, we are raising our price target to $345 (from $285), which assumes a 21x terminal FCF multiple. Moreover, while we were NOT able to conduct a survey internationally, our anecdotal conversations while overseas suggest that there could be even MORE pricing power in places like Europe, Italy, Switzerland and even Latin America than what is suggested today. In fact, these conversations are what led to our analysis on different price points in the first place,” Sena contends.

TipRanks indicates cautious optimism circles this tech giant when it comes to Wall Street opinion. Out of 35 analysts polled in the last 3 months, 22 are bullish on NFLX stock, 12 are sidelined, and just 1 is bearish on the stock’s prospects. Yet, apprehension is clearly baked into these analysts’ expectations, as the 12-month average price target of $311.52 reflects where the stock is currently trading.