By Ciara Linnane, MarketWatch
Imperial Capital is also bullish and says it hopes Netflix can decouple from other 'FAANG' stocks
Netflix Inc. shares soared more than 9% Friday, after Goldman Sachs added the stock to its Conviction List and said a 36% pullback from the record set last July presents an attractive buying opportunity.
Analysts said they are sticking with a $400, 12-month stock price target, which is 49% above the closing price on January 2. That is well above the average of 12% upside that Goldman is expecting for other internet stocks.
"We continue to believe Netflix's (NFLX) investment in content, technology and distribution will continue to drive subscriber growth well above consensus expectations both in the U.S. and internationally," Goldman analysts wrote in a note.
They are also expecting the company to return to the high-yield bond market in the next three years as it seeks to raise the funds needed to finance its content spend and offset cash burn that is expected to come to about $3 billion in 2019.
"We see a path for Netflix to both double its annual content investment and generate positive cash returns by 2022 while improving leverage and interest coverage ratios vs. 2018, as the company begins to fully amortize owned originals," said the note.
Don't miss:Everything coming to Netflix in January -- and what's leaving (http://www.marketwatch.com/story/everything-coming-to-netflix-in-january-and-whats-leaving-2018-12-31)
Related: Netflix: Nearly one-third of subscribers watched 'Bird Box' in first week (http://www.marketwatch.com/story/netflix-nearly-one-third-of-subscribers-watched-bird-box-in-a-week-2018-12-28)
Goldman is confident that the streaming giant sill has significant room to grow in developed markets including the U.S. and Europe, even though it has already achieved strong market share in those regions, which tend to offer higher average revenue per user. It cited data from Sensor Tower, a mobile app marketing intelligence service, that suggest that North America app downloads reached record monthly growth in December of 12% year-over-year, despite the fact that 50% of broadband households in the U.S. already have Netflix. In Europe, monthly download totals rose 49%, while they rose 71% in the rest of the world.
Don't miss:Netflix stock falls after SunTrust slashes price target (http://www.marketwatch.com/story/netflix-stock-down-25-after-suntrust-slashes-price-target-2019-01-02)
"We believe the fourth quarter will only be the beginning of the payoff from Netflix's accelerating spend and increasingly robust originals slate, and that consensus continues to significantly underestimate the financial impacts of these dynamics," said the note.
Separately, Imperial Capital reiterated its outperform rating on Netflix stock, the equivalent of buy, and said it is still comfortable with estimates heading into the first-quarter earnings season.
In case you missed it:Netflix to idiots: Don't hurt yourself doing 'Bird Box' challenge (http://www.marketwatch.com/story/netflix-to-idiots-dont-hurt-yourself-doing-bird-box-challenge-2019-01-02)
Analyst David Miller is sticking with his $459 stock price target, which is about 58% above Friday's trading level.
Miller said the appointment of Spencer Neumann as chief financial officer earlier this week is positive, given his private equity background, having worked at Providence Equity Partners and Summit Partners from 2005 to 2012. Neumann was hired away from videogame maker Activision Blizzard Inc. (ATVI) where he was also CFO.
See now: Netflix reportedly set to produce 90 movies a year, with budgets up to $200 million (http://www.marketwatch.com/story/netflix-reportedly-set-to-produce-90-movies-a-year-with-budgets-up-to-200-million-2018-12-16)
Related: Netflix is taking on billions more in debt to keep churning out content (http://www.marketwatch.com/story/netflix-is-taking-on-billions-more-in-debt-to-keep-churning-out-content-2018-10-23)
"This could prove advantageous, in our view, as Netflix, through its most recent $2.0 billion bond issuance on October 22, has become much more leveraged versus this time last year, and financial executives with private equity backgrounds tend to be, more often than not, ROIC (return on invested capital) focused, with debt, rather than equity as the core engine of growth," Miller wrote in a note.
With long-term debt now standing at $8.33 billion, that's what Netflix needs, as free cash flow is still negative and the stock is still reflecting the sum of all free cash flows discounted into the future, he wrote.
Imperial is hoping that Netflix can decouple from "FAANG," the acronym that groups the stock along with Facebook Inc. (FB), Amazon.com Inc.(AMZN), Apple Inc. (AAPL) and Google parent Alphabet Inc. (GOOGL) The stock's 40% gain in 2018 could have been bigger, were it not for the market psychology surrounding the other FAANG stocks and their shortfalls in the third quarter, he wrote.
"As such we would advise investors ignore the noise around "FAANG", and instead focus on core fundamentals, which for Netflix, are quite healthy," said Miller.
The S&P 500 fell about 7% in 2018.
-Ciara Linnane; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
January 06, 2019 11:43 ET (16:43 GMT)
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