Goldman Sachs says Netflix is one of the best bets in the Internet space, and that its cash burn is just starting to pay off

Hector Vivas/Latin Content/Getty ImagesReed Hastings, CEO of Netflix
  • Netflix shares jumped over 9% Friday after Goldman Sachs added the stock to its Conviction List and called it one of the best bets in the internet sector.
  • The stock’s 30% plunge since its all-time high last year is creating a buying opportunity, the firm’s analysts said.
  • They also expressed confidence in the streaming platform’s subscriber growth, and said its cash burn is finally starting to pay off.
  • Watch Netflix trade live on Markets Insider.

Netflix soared 9% Friday after Goldman Sachs analysts doubled down on their bullish view, calling it one of the best bets in the internet space right now.

“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,” analysts led by Heath Terry said in a report.

They think Netflix “represents one of the best risk/reward propositions in the Internet sector” and added the name to its Conviction List. Moreover, Goldman says the company’s cash burn – which critics have long pointed to as a reason to be bearish on the name – will start paying off this quarter. In its last quarterly earnings report, Netflix said it would burn through $US3 billion in 2018.

“We believe 4Q 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,” Goldman Sachs said.

Another key driver of their bullish view is the belief that Netflix has a competitive advantage when it comes to factors like the size and “stickiness” of its user base, along with engagement levels.

Shares plunged by as much as 45% from their record high hit last year, sparked by the company’s July earnings report that showed fewer-than-expected subscriber additions. But even solid subscriber growth the following quarter wasn’t enough for the stock to stage a meaningful comeback as the broader stock market suffered through an ugly fourth quarter.

The sharp sell-off in Netflix shares has created a buying opportunity for investors, the analysts said. They see shares soaring 35% over the next year to $US400.

Risks to the team’s bullish thesis include competition from both new and established players in the streaming space, and emerging-market exposure.

Others on Wall Street are less sanguine on the stock in the near-term. Earlier this week, analysts at SunTrust lowered their price target, forecasting weaker-than-expected subscriber growth for the fourth quarter.

Netflix is set to report its fourth-quarter results on January 17, with analysts surveyed by Bloomberg anticipating adjusted earnings of $US0.39 a share on revenue of $$US4.21 billion.

Now read:

Netflix shares.Markets InsiderNetflix shares.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.