There are many reasons to be bullish on Netflix, Inc. (NASDAQ:NFLX), but trading NFLX on speculation that it’s about to enter China is not one of them.
Ted Sarandos, the company’s chief content officer, was at a media conference in Seoul the other day, when he said, “we continue to look into China,” Reuters reports. And like that, shares are popping on Netflix China chatter.
Please.
Of course NFLX is eyeing China … it has made no secret of that. Heck, you couldn’t keep that a secret even if there were a reason to try. Who needs an MBA to know that, gee, China is a big market?
It is reasonable to factor some possibility of China as a future source of growth into Netflix stock. It’s not crazy to add something to the long-term growth rate or earnings multiple on the idea that one day it will become a source of revenue for the company.
But you don’t trade NFLX stock because you think it’s happening anytime soon. As Tuna Amobi, an analyst with S&P Global Market Intelligence, told CNBC yesterday, when it comes to the idea of Netflix China, it’s “a marathon, not a sprint.”
Amobi thinks NFLX will have a more specific strategy sometime later this year, noting that the Chinese market comes with particularly difficult challenges.
For one thing, this is Alibaba Group Holding Ltd‘s (NYSE:BABA) home turf. There are censorship issues. And broadband speeds are slower than in the U.S.
To be sure, Amobi is bullish the idea of Netflix China, who rates NFLX stock at “Buy.” Here’s what he told CNBC:
“They are moving in the right direction, and if Netflix can be very smart about how they launch or whom they partner with, I think there is really tremendous upside here.”
NFLX Upgrade Juices Shares Again
You don’t need any sort of imminent invasion of the Chinese market to make a buy call based on international expansion, anyway.
Shares popped Friday after an analyst at Canaccord Genuity initiated coverage at “Buy” with a target price of $120 (S&P’s Amobi also has a price target of $120 a share on NFLX stock.)
Recent sluggishness in international subscriber growth is temporary and will soon bounce back, writes Michael Graham. From his note to clients:
“With vast potential in the other 179 markets and the potential to move from a top-of-market skim product to more of a mass-market product internationally, we see a long runway for growth. In the U.S., competitive offerings will proliferate, but in a new un-bundled OTT world … Netflix should move from being a substitute good to a complementary good relative to cable, and this should foster continued growth domestically.”
The value proposition in Netflix stock goes well beyond anything China has to offer. As big as China may be, the world is larger, and that’s where Netflix has hitched its wagon.
There are ample reasons to be bullish on NFLX without falling for rumors about Netflix China.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
