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The 9.75 Million Reasons Netflix Stock Remains a Great Investment

As long as subscriber growth keeps moving higher, NFLX stock will, too

By Will Ashworth, InvestorPlace Contributor

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The 9.75 Million Reasons Netflix Stock Remains a Great Investment

Netflix (NASDAQ:NFLX) shareholders have come to appreciate it that when Wall Street boosts subscriber forecasts, NFLX stock is usually quick to respond.

And Wall Street, in this case Credit Suisse (NYSE:CS), on Friday upped their estimate of the number of net new subscribers the streaming service will add in the fourth quarter to 9.75 million. Netflix was expecting 9.4 million. The “usually quick to respond” market pushed NFLX stock up almost 4%, on a day when most of the major indexes saw red.

“We continue to believe competition, content and cost concerns are overblown and that the Street is too conservative regarding the growth outlook for Netflix,” said Credit Suisse’s media team, led by Douglas Mitchelson. “The primary driver of Netflix shares will continue to be subscriber growth, especially if (average revenue per user), margins and (free cash flow) burn remain consistent with guidance and investor expectations,” the analysts told clients

This matters because the wall of worry for NFLX stock investors continues to be subscriber growth. Here in the U.S., things are slowing, albeit marginally, while internationally, business is pretty brisk.

But can it stay this way?

InvestorPlace feature writer James Brumley recently made the case that Hulu is encroaching on Netflix’s U.S. beachhead, adding more domestic subscribers, suggesting those owning Netflix stock ought to be concerned.

While Brumley makes some excellent points, I believe Netflix is still a great investment.

A Concern About Growth

To be sure, some analysts see weaker U.S. and international subscriber additions in the fourth quarter.

Sun Trust (NYSE:STI) analyst Matthew Thornton cut his 12-month target price by $55 to $355 on Jan. 2. Although the analyst kept his “buy” rating on NFLX stock, he suggested that Netflix likely won’t hit the 1.75 million estimate for U.S. subscriber additions in the fourth quarter and international subscriber additions could fall well short of the estimate of 7.3 million.

Overall, Thornton sees global additions of 8.65 million, 11% lower than the estimate from Credit Suisse.

Who will be right when Netflix reports its Q4 2018 earnings after the markets close on Jan. 17? Stay tuned.

The Stat That Makes Netflix Stock Great

I’ve made some brash predictions about Netflix in the past. In August, I made a case why its stock will go to $1,000, despite the fact it’s never been higher than $423.

At the time it was trading at $360, a price I thought was a steal for the world’s largest video streamer.

Now trading around $325, I’m not as confident about a $1,000 share price anytime soon (the markets do humble us all), but I’m not jumping off the Netflix bandwagon until I see its operating profit per subscriber begin to slow.

Here’s what I said about this subject:

“Back in 2012, Netflix had 27.6 million paid subscribers, an operating profit of $50.0 million or $1.81 per subscriber and a market cap of $5.1 billion — a multiple of 102 times its operating profit,” I wrote August 29.

“Fast forward to 2017, Netflix had 110.6 million paid subscribers, an operating profit of $838.7 million or $7.58 per subscriber and a market cap of $83.1 billion, a multiple of 99 times operating profit.”

Investors in 2017 were getting Netflix stock at a lower multiple to operating profit despite that profit being 17 times greater based on total dollars and four times greater per subscriber.

What Will Q4 2018 Bring to NFLX Stock?

Flash forward to its most recent figures from the third quarter. Netflix had an operating profit of $1.39 billion through the first nine months of the year. Annualize that and you get $1.85 billion.

At the end of the third quarter, it had 130.42 million paid subscribers around the world which works out to $14.18 per subscriber, almost double what it was at the end of 2017.

Based on a current market cap of $146 billion, investors are currently paying 79 times operating profit for Netflix stock. That’s considerably cheaper than at any other time in the past, despite the fact it’s making almost double the amount from each subscriber that it did at the end of 2017.

I’ll continue to say it.

As long as this one metric looks good, I see NFLX stock as a great investment, no matter the short-term concerns about subscriber growth.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/the-9-75-million-reasons-netflix-stock-remains-a-great-investment/.

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