Shares of Netflix NFLX soared over 9% Friday as part of a larger market turnaround on the back of an impressive jobs report that saw giants Intel INTC, Microsoft MSFT, and Apple AAPL all pop as well. With that said, Netflix’s jump could be based on more company-specific news that might leave some investors feeling the need to buy NFLX stock to start 2019.
Goldman Sachs GS thinks that the streaming giant is due for a blockbuster style comeback this year after it was hammered in the second half of 2018. Goldman reiterated its buy rating and its $400 price target for Netflix stock in a note to clients Friday. The firm’s price target marks a roughly 48% upside to NFLX’s closing price of $271.20 a share on Thursday.
Goldman addressed Netflix’s somewhat worrisome spending habits as it ramps up its cash burn in order to bolster its original content library as the streaming wars heat up. Analyst Heath Terry said that Netflix will likely have to return to the high-yield debt market over the next few years, but does see the firm creating positive cash returns by 2022.
Plus, investors will be pleased to hear that the Goldman analyst believes Netflix has plenty of room for growth in highly saturated markets such as the U.S. and Europe, which will likely prove vital to both its short-term and long-run success. “We continue to believe Netflix's investment in content, technology and distribution will continue to drive subscriber growth well above consensus expectations both in the U.S. and internationally,” Terry wrote in a note Friday.
“We believe the fourth quarter will only be the beginning of the payoff from Netflix's accelerating spend and increasingly robust Originals slate, and that consensus continues to significantly underestimate the financial impacts of these dynamics.”
New CFO & Cash Flow
Clearly, Goldman is bullish on Netflix even as investors ran away in the second half of 2018. Plus, the chart shows us the relatively large amount of long-term debt the streaming power has taken on recently. Fittingly, however, the company hired Spencer Neumann as its new chief financial officer earlier this week. Neumann’s hire comes after long-time Netflix CFO David Wells announced his plans to resign in August.
Neumann, who joins the streaming firm from Activision Blizzard ATVI, will likely try to figure out how to simultaneously balance Netflix’s content spending and create value for shareholders. In the end, though, Netflix will simply have to prove that its massive spending, which could reach $13 billion in 2018, translates into more subscribers and higher earnings.
We should note that Netflix had a negative free cash flow of $859 million in Q3. The company also projects that it will have a negative free cash flow of $3 billion in 2018.
Looking ahead, the streaming firm projects its 2019 cash flows will fall in line with 2018. “We recognize we are making huge cash investments in content, and we want to assure our investors that we have the same high confidence in the underlying economics as our cash investments in the past,” Netflix wrote in its Q3 letter to shareholders.
“These investments we see as very likely to help us to keep our revenue and operating profits growing for a very long time ahead.”
Netflix expects to add a total of 9.4 million subscribers in the fourth quarter, which would bring its total to 146.5 million worldwide—Netflix added 8.3 million subscribers in Q4 last year. Clearly, Netflix’s user base helps the company stand out in a very crowded streaming entertainment age. However, the company faces challenges not only from smaller niche offerings and Hulu, but also from Amazon AMZN and soon enough Disney DIS, Apple, and AT&T T.
Looking ahead, our current Zacks Consensus Estimate calls for Netflix’s Q4 revenues to jump 28% to reach $4.21 billion. At the bottom end of the income statement, the company’s adjusted Q4 earnings are projected to sink 39% from the year-ago period to hit $0.25 a share. With that said, NFLX’s adjusted Q1 2019 earnings are expected to surge over 28%.
The Los Gatos, California-headquartered firm had enjoyed a run of insane success until its relatively alarming second-quarter subscriber miss led to the second half of 2018 selloff. Netflix also obviously has some underlining financial concerns to address as it ramps up its spending to attract new users.
In the end, Netflix’s transition from aggregator into an original content juggernaut, in roughly five years, helped it become one of the hottest stocks on the market. Going forward, Netflix’s ability to convert its new titles, which include many more big-budget offerings with A-list Hollywood stars, into subscriber growth might be all that really matters. But Amazon and its soon to be streaming rivals have much more money to spend.
Netflix is currently scheduled to release its Q4 financial results on January 17.
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