As Netflix II unfolds, not only is it on a tear, but it’s just been given a major price-target boost, courtesy of Goldman Sachs, which sees shares rising a whopping $100, reaching $490.
For Goldman, even though Netflix is up almost 90 percent so far this year and its market cap has more than doubled, there’s still plenty of upside, and many would argue that it’s the biggest thing in entertainment today.
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Netflix closed at $390 on Tuesday, so Goldman’s target at the time was a 35-percent increase.
"We believe the growing content offering and expanding distribution ecosystem will continue to drive subscriber growth above consensus expectations. Based on the pace of both, we're raising our revenue estimates and price target," analyst Heath Terry wrote in a note to clients Wednesday.
But even for a company that is one of the top performers on the S&P 500 this year, the Goldman bump will raise a few eyebrows.
After all, it comes despite a negative free cash flow, and despite heavy spending on content at the same time.
"We believe Netflix's ability to spend significantly more on customer acquisition while still producing ~4pps of operating margin expansion for the full year, on our estimates, will allow the company to drive additional subscriber growth, particularly in markets where the company's brand presence isn't as strong as it is in the U.S.," Terry wrote.
So the Goldman bump is on good faith that subscribers will continue to soar (as they did in the first quarter results), and that the love for Netflix has long legs.
Right now, those legs are stretching themselves into original content. Related: Investors Scramble To Secure Property On The Korean Border
Last month, Netflix estimated that 85 percent of its total spending was going to original content, with Chief Content Officer Ted Sarandos telling a New York conference that Netflix had 470 original programs scheduled for release by year’s end. Or, in other figures, 1,000 original shows total. That takes Netflix far beyond simple streaming. In still other figures, it means $8 billion in content spending this year—much of it on originals.
This is the second phase of Netflix, and everyone seems to like it.
Goldman sees Netflix continuing to outperform, and they widely expect the streaming giant to beat Wall Street estimates for subscriber numbers for next year. The Wall Street consensus is 26 million subscribers, but Goldman thinks it will be over 32 million.
Originality has already paid off for Netflix.
Because of its new, original content, it managed to attract 7.4 million new customers in the first quarter. Investors were reassured, to say the least. Wall Street had expected 6.5 million new users, so Netflix blew by that easily, coming in one million stronger.
Negative free cash flow isn’t bothering investors right now. Outsized growth potential more than makes up for that.
For Netflix, Green is the New Black, and Goldman seems smarter on this than Wall Street.
By Josh Owens for Safehaven.com
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