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How Much Higher Can Netflix, Inc. Realistically Go?

Netflix is the leader in a secular growth market, and NFLX stock has room to run

By Luke Lango, InvestorPlace Contributor

http://bit.ly/2x31HlK

Say hello to the era of internet entertainment. Everyone is cutting the cord, and they are all migrating to over-the-top streaming platforms. That is great for Netflix, Inc. (NASDAQ:NFLX), who just reported another quarter of much-better-than-expected sub growth.

But NFLX stock, which traded higher after hours, is actually in the red in early Tuesday morning trading. A failure to trade higher on exceptional numbers is usually a sign of a maxed out valuation.

That doesn’t look to be the case here.

While there are risks related to the NFLX bear thesis (content spend just keeps going up, cash burn remains a problem, competition is coming in a big way soon, and the valuation remains rich), the core reason to own NFLX stock remains intact.

Netflix continues to grow its leadership position in a secular growth market, giving the company a bullish, robust growth trajectory for many years to come. That robust growth will allow NFLX stock to earn healthy returns on its current high content spend rate, turn cash burn into cash flow, mature alongside competition, and gradually grow into its valuation.

Put it all together, and NFLX stock should keep heading higher.

A Deeper Look Into Netflix’s Quarter

Netflix had another exceptional quarter. Domestic streaming net adds (850,000) came in above expectations (774,000). Same with international streaming net adds (4.45 million versus expectations for 3.72 million). Year-to-date, net adds are 15.5 million, up 29% versus last year.

That is pretty impressive, considering Netflix isn’t anything new. It has actually been around for a while.

So why is the Netflix growth narrative all the sudden accelerating this year? Two big reasons.

One, the internet entertainment space is actually picking up momentum. Whereas some believed that the shift from linear to internet TV would moderate, it has actually accelerated. More people than ever are dropping cable packages and picking up Netflix-like services.

Two, Netflix remains the default option for cord-cutters due to its robust portfolio of original content. This is the more critical trend at play here. Ever since Netflix doubled down on original content, subscriber growth numbers have boomed.

These two tailwinds will remain in play into the foreseeable future, guaranteeing NFLX robust growth numbers for multiple years.

Although Netflix is maxing out in terms of U.S. growth, international markets are starting to strongly adopt the internet TV shift. The international growth potential is huge considering Netflix only has 56.5 million international subs (versus 52.8 million in the U.S.).

Meanwhile, Netflix is raising its content spend rate to continue to produce quality original content and build out its content moat. Although the increased content spend is a major headwind to near-term cash flows, it serves two critical, long-term advantages. It will allow Netflix to remain the default over-the-top streaming platform, and it will help NFLX stock fend off growing competition.

After all, competition is coming in a big way. I’m looking mostly at Walt Disney Co (NYSE:DIS) to make some serious noise in this space over the next several years. The owner of arguably the best content in the world (look at box office results) is getting serious about its push into internet TV. They have plans to pull all their content from Netflix and are launching multiple Netflix-like streaming platforms over the next several years.

Because of Disney’s robust content portfolio, these streaming platforms will inevitably launch with high demand. Thus, it is critical for Netflix to build out its content moat in order to remain the market leader.

Netflix is committed to doing that. Content spend expectations for next year rose from $7 billion to $7.5 billion. While some investors are interpreting that upped content spend as a negative, I think it’s a positive. It means NFLX is appropriately positioning itself to remain the market leader.

Bottom Line on NFLX Stock

I’m long both DIS and NFLX stock. The internet entertainment space is growing rapidly. There is enough space for multiple competitors to succeed at a high level.

In 5 years, I think the two biggest players in this space are NFLX and DIS. At the end of the day, all that really matters for these streaming platforms is content. If you have great content, people will pay to watch it.

NFLX continues to produce the best original content in the game right now, while DIS owns arguably the most valuable and diverse content portfolio in the world.

So is this failure to rally after a great quarter a signal of worse times ahead for NFLX stock?

No. It’s just a pause in a very strong secular growth narrative.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/netflix-inc-nflx-stock-realistically-higher/.

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