Rebound in Netflix (NFLX) Stock will Continue

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Netflix, Inc. (NASDAQ:NFLX) stock got hit big when Walt Disney Co (NYSE:DIS) announced they were pulling their movies from the streaming platform starting in 2019. The concern was that without Disney movies to complement the company’s own content, the NFLX growth story becomes too reliant on original content, so NFLX stock sold off.

nflx stock
Source: Via Netflix

But its bounced back.

Why? Because Disney movies never really fit in with the revamped NFLX growth narrative, which is centered around original content. As such, the disappearance of Disney content from Netflix wasn’t a matter of if, but rather a matter of when.

The market found out when.

The stock had an ugly, visceral reaction. But now its back because, well, not much has really changed for Netflix. The value of Netflix isn’t being able to watch “Moana”. Firstly, many already saw it in theaters. Secondly, it can be rented on Amazon.com, Inc. (NASDAQ:AMZN) for $3.99.

The value of Netflix is being able to watch “Stranger Things”. After all, you can’t watch this compelling sci-fi series anywhere else but Netflix.

So, that is why NFLX stock has bounced back.

And luckily for investors, this rebound will will likely continue because the original content value proposition is only getting stronger.

Netflix is the Future of Content Consumption

There has been a lot of positive sell-side buzz around NFLX stock recently.

Guggenheim likes Netflix’s Asia growth story. The investment firm recently hiked its price target from $190 to $210, implying about 15% upside. Bernstein also sounded a bullish tone on NFLX stock recently, noting that Disney movies weren’t all that important to the international growth narrative (Disney movies are only available in two countries outside of US and Canada). Meanwhile, Raymond James noted that Netflix captures more than half of all paid hours streamed on Roku, supporting the notion that Netflix continues to dominate the paid streaming world.

Those are all pretty good viewpoints which come together to support one central thesis surrounding Netflix: it is the king of the streaming video-on-demand space, and this space is the inevitable future of content consumption.

Let’s look at just how much value consumers give to Netflix. More than 2 billion people use Facebook because it’s free. But to get more than a 100 million people paying roughly $10 per month for a streaming video service? That is pretty impressive. It’s even more impressive that Netflix is adding between 4 to 5 million paying members every quarter.

To put that in perspective, look at Snap Inc (NYSE:SNAP). Snap is free, but it isn’t all that much bigger (177 million daily Snappers versus 104 million Netflix members), nor is it growing that much faster (5-8 million new users per quarter versus 4-7 million net adds per quarter for Netflix).

Why do consumers continue to flock to Netflix?

Two big reasons.

1) Internet entertainment is the future. Cord-cutting is still happening everywhere and more and more people are consuming media through alternate, internet-based mediums.

2) Netflix has the most compelling value proposition in the internet entertainment space. And that value prop is only growing. For $10 a month, you get Netflix classics like “House of Cards” and “Orange Is the New Black” as well as newer Netflix originals like “Stranger Things” and “13 Reasons Why”. With each new original hit (and even with each new release of an old original hit), the Netflix value prop grows.

Bottom Line on NFLX Stock

For all the talk of an overextended valuation, NFLX stock really isn’t all the expensive.

NFLX trades at 91 times  its fiscal 2018 earnings estimates on forward earnings growth projections of about 77.5%. This means NFLX stock is trading at an 18% premium to its growth projections.

The S&P 500, meanwhile, trades at a 60%-plus premium to its earnings growth projections (17 times FY18 earnings for ~10.5% multi-year earnings growth).

So, after considering the streaming platform’s robust growth potential, is NFLX really overvalued?

No. Its actually notably undervalued.

As of this writing, Luke Lango was long NFLX, DIS, and AMZN. 


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/rebound_in_netflix_nflx_stock_will_continue/.

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