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ETFs to Buy on Netflix Rise Following Goldman Upgrade

Zacks Equity Research

The world's largest video streaming company, Netflix (NFLX) had a sizzling start to July. Its shares moved up 7.38% on July 1, 2014 in the key trading session though it fell 1.34% the day next probably to reflect short-term profit booking activity. The surge in prices can be attributed to an elevated outlook on the stock by Goldman Sachs.

The notable investment house showed optimism on the company’s subscriber growth, raised the price target of the stock and upgraded it from ‘neutral’ to ‘buy’. Goldman now sees potential in the Netflix stock to return about 34% over the next one year, going by a Forbes report.

Netflix shares have added around 30% in last three months. Investors should note that Netflix has surprised the Zacks Consensus Estimate for earnings in last four quarters, with the average beat being 13.25%.

Goldman analyst Heath Terry believes that Netflix will be able to double the subscriber base over the next three years as the company entered into 6 European markets, namely Germany, Austria, Switzerland, France, Belgium and Luxembourg this year and  two to four markets every year  thereafter.

Terry also raised the 2018 revenue and EPS outlook for Netflix to reflect its significant growth in subscriber base. Revenues are projected to hit the $14 billion mark by 2018 as compared to the present consensus view of $11 billion and earnings per share are expected to touch $57.83, way higher than the consensus estimate of $18.81 (read: Will Solid Netflix Earnings Drive These ETFs?).

Market Impact
 
Investor enthusiasm over the stock is likely to exert some upward pressure on the following ETFs that are heavily invested in Netflix. We have highlighted two ETFs with the highest allocation to Netflix that are in focus following the company’s bullish outlook. Notably, the duo presently carries a Zacks ETF Rank of 2 or Buy rating with a 'High' risk outlook:
 
PowerShares Nasdaq Internet Portfolio (PNQI)

This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The fund holds about 99 stocks in its basket with AUM of $325.7 million while charging 60 bps in fees per year. It trades in moderate volumes of more than 60,000 shares a day (read: eBay's Weak Earnings Guidance Puts These ETFs in Focus).

The in-focus Netflix occupies the seventh position with a 4.22% allocation. In terms of industrial exposure, Internet software and services make up for more than two-thirds of the basket, followed by Internet retail. PNQI has gained about 1.17% so far this year (read: 3 American ETFs That Saw Fireworks to Start 2014).

First Trust Dow Jones Internet Index (FDN)

This is one of the most popular and liquid ETFs in the broad tech space with AUM of over $1.9 billion and average daily volume of more than 650,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 57 bps in fees per year (read: Technology ETFs: Pain or Gain Ahead?).

In total, the fund holds 42 stocks in its basket with the in-focus Netflix taking the ninth spot with a 4.31% share. From a sector look, Information Technology accounts for more than half of the portfolio while Consumer Discretionary makes up for 25%. The ETF is up about 0.75% year to date.

Bottom Line

The in-vogue Netflix stock has returned more than 100% over the last one year, breezing past most of its peers like Priceline.com Inc. (PCLN), eBay Inc. (EBAY), Amazon.com Inc. (AMZN), Time Warner Inc. (TWX), IAC/InterActive Corp. (IACI) and Groupon Inc. (GRPN).

While eBay and Groupon lost about 5.2% and 27.4%, respectively, Priceline, AMZN, TWX and IACI added a respective 47.2%, 17.2%, 23.2% and 46.1% (read: eBay's Weak Earnings Guidance Puts These ETFs in Focus).

In any case, Netflix operates on a sound business model. The recent upgrade by Goldman came as an icing on the cake, especially at a time when the company is looking to test waters in foreign shores.

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