Netflix’s (NFLX) stock has just received a price-target increase, with analysts saying that the market is underappreciating the company’s potential for higher earnings.
On Thursday, July 13, Morgan Stanley analyst Benjamin Swinburne upped the company’s price target to $185 from $175, but reiterating his overweight rating on the Internet television network’s stock.
Netflix stock hit its record high of $166.87 on June 9, and has continued to form a “flat base” over the past few weeks with a buy point of $166.97, Investors.com reports. On Wednesday, the stock climbed over its 50-day moving average showing bullish signs.
According to Swinburne, there is a positive correlation between the amount of content Netflix streams in a region and how much viewers there are in that region. As newer markets get more content, subscription growth in those regions will continue to increase.
Netflix spends billions on content, which is partially funded through a growing debt load, Variety reports. As of March 2017, the network has $11 billion worth of content assets. According to Swinburne, Netflix-owned original movies and TV shows make up 15 percent of the total content assets. The network’s original content includes series “Stranger Things,” “Orange is the New Black,” “Glow,” and “13 Reasons Why,” as well as comedy special “Okja” and movies like “War Machine.”
At the same time, the network has also been cancelling underperforming shows like “Sense8,” “Girlboss,” and “The Get Down.” This implies that Netflix may be expected to pump more money into originals.
According to Swinburne, the more original content, the better for the company. “As Netflix owns more of its content outright, the longer average life and increasingly global nature of its assets could drive increased content efficiencies and higher margins over time,” Swinburne wrote.
The network’s net content value is even bigger than that of Warner, which currently has $10 billion, and larger than Viacom, Discovery Communications, AMC Networks and Scripps Network’s combined content assets of $4.9 billion, $2.4 billion, $1.5 billion and $1.1 billion, respectively.
For the premium video-on-demand sector, Netflix currently competes with Amazon.com (AMZN) and Time Warner’s (TWX) HBO among others.
However, Swinburne pointed out that the Netflix’s revenue from these content is still behind that of traditional TV and film titans. The network generates a revenue of bout $1 for every dollar of net content value, while traditional entertainment conglomerates get about $2 to $4.
“Netflix is building a much larger profit pool than the market understands,” the analysts wrote in the research note.
While there is no guarantee that the network can monetize its content with the same rate of returns as that of traditional TV networks, considering that Netflix does not offer advertising, there is still a significant potential for the company to drive earnings, the Morgan Stanley analysts said.
However, not all analysts agree. On Wednesday, Wedbush Securities analyst Michael Pachter maintained his underperform rating on Netflix stock with a price target of $73.
“As competition drives the cost of content inevitably higher, we expect Netflix cash burn to continue, and management acknowledged that this will persist for ‘many years,’” Patcher wrote. “International profits may remain elusive due to competition for content and subscribers, while domestic growth inevitably decelerates.”
On Thursday, consulting firm Media Partners also said that the network is currently struggling to get more subscribers in the Asia-Pacific region, Nikkei Asian Review reports. Asia-Pacific subscriber base is about 4.8 million, which is only about 1.4 percent of the total paid online video subscribers in the region, which is at 341 million.
A Reuters poll also showed that password sharing has become a growing problem for Netflix. According to the survey, at least 21 percent of streaming viewers aged 18 to 24 said they had used another person’s log-in credentials on a digital video service. About 12 percent of adults are said to be doing the same thing.