Netflix, the stock that keeps on rising, got a big vote of confidence today from Imran Khan at JP Morgan.
Khan rates Netflix “overweight” and has an end of 2011 price target of $181. The stock is trading around $148 today. Here’s the bullet points on why Khan is bullish:
- Significant headroom for subs growth. Netflix ended 2Q with 15M subs; we are projecting the company to reach 24M by the end of 2011. While this represents rapid growth from a relatively lower base, we note it is still below, e.g., HBO, which has 29M subs at a higher ASP.
- Barriers to entry higher than sceptics think. We see a group of factors working together to make entry into the space difficult for others. (1) Netflix has a huge lead in device penetration. (2) Netflix has spent over $1B on marketing since F’06. (3) Netflix’s recommendation technology enables it to monetise long-tail content in ways it would be difficult for new entrants to achieve. (4) Netflix has a suite of streaming content (some exclusive) that would be expensive for others to build.
- New entrants are growing but legacy competition is decreasing. Several new players are entering the space – Google, HBO Go – and companies such as Amazon and kiosk operators are building out their offerings. However, we think continued declines on the retail rental side create an offsetting opportunity. Further, we think the new entrants’ lack of scale could hinder their ability to compete effectively with Netflix.
- Rising content costs are manageable. We estimate that Netflix spent $411M on content in F’09. We believe the company can afford to pour ~$800M into content in F’11 while maintaining our 14%+ pro forma operating margin est., and ~$1B+ in F’12. We think this makes Netflix a strong potential content distribution partner, and it would be irrational for studios to turn down additional monetization of their content.
- $181 PT. We are introducing our F’12 estimates as well as our end-2011 price target of $181. This compares to our previous end-2010 price target of $136. Our new price target is derived using a DCF, and driven by increased confidence in the ability of Netflix to add subscribers while growing margins. We reiterate Overweight.
See Also: The 15 Top Tech Takeover Targets
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