Why Netflix Stock Will Rise Back Above $300 In 2019

The two prior big selloffs in Netflix stock ended with huge rallies

Netflix stock - Why Netflix Stock Will Rise Back Above $300 In 2019

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It is often darkest just before dawn. That saying seems especially true for Netflix (NASDAQ:NFLX) stock. The streaming giant has been on a wild roller coaster ride over the past decade. But, Netflix stock’s biggest rallies tend to happen only after a period of prolonged weakness.

The first big drop was in 2011. Netflix stock dropped from $40 to $10 in just a few months as consumers left the service following a controversial decision to split apart the DVD and streaming businesses. That decision, though, ultimately proved prescient. By mid-2015, streaming became the norm. The DVD business became a relic of the past. Importantly, Netflix stock grew by more than ten-fold to $125.

The second big drop came shortly thereafter. Netflix stock dropped from $125 to $80 in 2015-16 as the company invested big into developing original content. Yet again, that decision proved to be prescient. The original content investments paid off in a big way. Subscriber growth kicked into the next gear. Revenue growth accelerated. Margins expanded. Profits soared. And NFLX stock increased by more than five-fold to $420 by mid-2018.

Now, we find ourselves in another big Netflix stock selloff. Over the past several months, NFLX has fallen from $420 to $260 on concerns related to slowing global growth and bigger streaming competition. But, these concerns, much like the concerns that sparked prior big selloffs in the stock, are overstated.

As such, history should repeat itself here. The late 2018 selloff in Netflix stock will ultimately turn into a 2019 rally.

Streaming Is the Future

The sell-off in NFLX stock started in July 2018 when the company reported its first subscriber miss since early 2017, and the widest subscriber miss (1 million) in several years. That miss birthed a flurry of slowing subscriber growth concerns that haven’t been put to rest since.

But, in the big picture, these concerns are overstated.

Streaming is the future of the global entertainment world. Right now, linear television is the global norm. That won’t be true for long. Streaming offers critical price and convenience advantages over linear TV that will allow it to takeover the global entertainment market. Namely, linear TV packages can run anywhere from $60 to $100 per month. Streaming is much cheaper, at around a global average of $10 per month. Also, linear TV isn’t on-demand or multi-screen. Streaming is both, and is therefore, far more convenient.

Thus, what the linear TV market is today, is what the streaming TV market will be in a decade.

The linear TV market measures 1.6 billion households today. The streaming market measures just 250 million households. Within a decade, due to streaming’s huge price and convenience advantages, those numbers will ultimately flip. Perhaps not entirely. But, the streaming market should be able to grow by at least three-fold over the next decade to 750 million households.

Even that conservative assumption implies huge growth potential ahead for the whole streaming market.

Netflix Is The King of Streaming

In this rapidly growing streaming market, there are multiple players. And, the market is only getting more crowded than ever, with big name players like Disney (NYSE:DIS) expected to make an entry in 2019.

Yet, despite all of that competition, Netflix is still the king of the streaming world. This will remain true for the foreseeable future.

At the end of the day, there are only two things that truly matter here: price and content. NFLX’s ~$11/month price is an industry standard price for a streaming video on demand service. Thus, the price checks out for continued dominance.

Its content also checks out. Netflix has built up a war chest of diverse and quality original content. As the company gets bigger, that original content is only getting better. The company’s most recent original hits, Black Mirror: Bandersnatch and Bird Box, are arguably among its two best pieces of original content yet. The Black Mirror movie blew audiences away with its interactive content, and received a strong 7.8 rating on IMDb. Meanwhile, Bird Box had 45 million viewers in its first week, the best showing ever for a Netflix original film.

As such, so long as NFLX maintains competitive pricing and continues to produce quality and diverse original content, this company will maintain its leadership position atop the streaming market.

The Math Behind $300

The math behind a $300-plus price target for Netflix stock in 2019 isn’t all that complicated.

Assuming that Netflix’s addressable market is equal to Facebook’s (NASDAQ:FB) addressable market, and accounting for the fact that multiple users can be on the same household account, it is easy to see that Netflix’s total addressable market within the decade measures around 750 million global households. Assuming varied conservative penetration rates across different geographies, it seems reasonable that Netflix hits 350 million global subs by 2027. That would mark just ~10% growth per year from 2017, versus 30% growth per year from 2011 to 2017.

Price hikes should persist with more original content, so average subscription price should move toward $15 during that stretch. If Netflix gets 350 million households globally to pay $15 per month, that implies $63 billion in revenue by 2027. Assuming operating expenses rise around 15% per year during that stretch (slightly above user growth), then operating margins should shake out in 2027 around 30%.

That combination of $63 billion in revenues and 30% operating margins implies $30 earnings-per-share as a reasonable target by 2027.

Growth stocks normally trade around 20X forward earnings. A 20 forward multiple on $30 in EPS implies a fiscal 2026 price target of $600. Discounted back by 10% per year, that equates to fiscal 2019 price target of just under $310 for Netflix stock.

Bottom Line on Netflix Stock

History says that, when it comes to NFLX stock, it is often darkest right before dawn. In that context, late 2018 was the darkest era, and dawn should come in 2019. As dawn comes, NFLX should rally above $300.

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


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/why-netflix-stock-will-rise-back-above-300-in-2019/.

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