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Summary

  • Goldman Sachs raised Netflix’s target price by more than $200 and expects that Netflix will deliver a 35% return over the next twelve months.
  • During the first quarter, Carl Icahn sold 16% of his stake in Netflix and the share price dropped; however, the price has now recovered.
  • Netflix has a solid expansion plan and the company has set its eyes on Europe to harness the growth potential of international subscribers.

Netflix's (NASDAQ:NFLX) stock is trading at new highs and this is due to a bullish note from Goldman Sachs (NYSE:GS). Goldman Sachs is predicting that the online video streaming giant will beat expectations with its strong subscriber growth. Based on the expected strong growth potential, Goldman Sachs raised the target price for Netflix by more than $200 and believes that this stock is capable of delivering a 35% return over the next twelve months. On the first day of July Netflix was trading at $473.10 per share which is the highest price this stock has ever reached. After this peak price its share price dipped and Netflix is currently trading at $441.58 per share. Netflix has outperformed the S&P 500 Index and year to date Netflix is up 21.5% whereas the S&P 500 is up 7.1%.

During the first quarter of fiscal year 2014, Carl Icahn sold 16% of his stake in Netflix, which raised concern in the market regarding the company's valuation and growth prospects. This led to a decline in the company's stock price. The stock eventually rebounded but the temporary price dip was a good opportunity to go long the stock.

Netflix Plans to Expand but There are Challenges Ahead

Netflix's international subscriber base is ready to receive a significant boost in the next few years. Netflix has a solid plan to aggressively expand and increase its market reach. The company will be adding six new markets this year and up to four new markets thereafter. The digital distribution of movies and TV shows has made the company a media force in the U.S. and now Netflix is looking ahead to do the same in Europe.

Back in May, Netflix announced it would expand its European offerings to six more countries, including Germany and France. France and Germany are two of the six largest broadband markets in the world and there is greater potential for online streaming to grow in Western Europe than in the rest of the world. The company is likely to increase its international subscribers by a substantial number making the stock a lucrative investment opportunity. By the end of the first quarter Netflix had 11.7 million paid subscribers. It is expected that this number will significantly grow to 62 million international subscribers in the coming years.

Although Netflix has a solid plan the company has to face several challenges in order to build a strong base. Netflix may face restricted programming issue because many domestic pay TV companies already have exclusive rights to some of the programming that Netflix's service typically carries. For example, in France Netflix will be unable to offer subscribers its own most popular in-house production, the political drama series "House of Cards" starring Kevin Spacey. The pay-television giant Canal Plus already has the French rights to the series.

Strong First Quarter Results

Netflix bested expectations for the first quarter of fiscal year 2014. Netflix added 2.25 million new domestic streaming customers during the quarter, in line with the company's January forecast and bringing the U.S. total to 35.7 million. International customers increased by 1.75 million, to 12.7 million, or 150,000 more than predicted earlier this year. First-quarter net income soared to $53.1 million, or $0.86 per share, from $2.7 million a year earlier, beating the average $0.81 per share estimate of 31 analysts. Sales advanced 24% to $1.27 billion, matching projections.

Netflix has a strong market share in the U.S but with its growth beginning to slow down, Netflix must expand in Europe, where it already has a foothold in Britain, Scandinavia and the Netherlands with a subscription service via cable or Internet broadband for which it charges the equivalent of about 10 USD a month. The opportunity for online video services is large and the number of pay TV households in Western Europe's largest economies is expected to increase by more than fourfold by 2019 to 24.5 million. Although Netflix may have to face competition, this expansion will return some handsome growth numbers in the next few years.

Video Streaming on Smartphones

Smartphone usage has been increasing at a rapid pace and with the introduction of high-end smartphones video streaming companies are also trimming their services according to customers' needs. To capture smartphone users, Netflix is looking for changing customer preferences. Netflix is accessible on mobile phones and was the first company to provide UHD video online to meet the demand for 4K resolution video. Netflix appears set to build a strong subscribers base through international expansion and improve its engagement with subscribers through better content and adaption of the latest technology.

Conclusion

Netflix's success has convinced some big sell-side firms to raise their outlook on the stock. Morgan Stanley (NYSE:MS) upgraded the target price of Netflix to $500, due to its innovation and international growth. Recently, Goldman Sachs increased the target price of Netflix to $590 from $380 and gave the stock a buy rating. Goldman Sachs estimates the number of international subscribers will increase from 10.9 million at the end of 2013 to 61.7 million by 2017, as opposed to the expectation of about 55 million from some other analysts.

Netflix will announce its second quarter earnings on 21st, July 2014. Expected worldwide streaming revenue will total $1.14 billion. For the second quarter, the company forecasts net income of $69 million, or $1.12 a share. The significant growth in the revenues and earnings stream and increased target price indicates handsome returns from this stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.

Source: Netflix: Expansion In Europe Will Enhance Returns