Netflix shares ended the week on a down note, declining almost 2% Friday to close at $429.32, but a Wall Street analyst reaffirmed his “buy” rating and said the company has “plenty of subscriber runway.”
The streaming stock has declined for five straight sessions, its longest such streak since February. Amid the downturn, on Tuesday, it established a record high of $458.97. In a turbulent market, it has fared much better than media shares, rising 30% in 2020 to date. Netflix reported in April that global subscriptions jumped by 16 million in the first quarter as a result of widespread stay-at-home orders due to COVID-19.
Jefferies analyst Alex Giaimo, who just started covering Netflix on May 14, reiterated his “buy” rating on its shares in a note to clients Friday, with a 12-month price target of $520.
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The company has “plenty of subscriber runway ahead,” Giaimo wrote, indicating he agrees with the bull thesis of double-digit subscriber growth for at least the next five years. At 182.8 million customers in 200-plus countries, the streaming giant is seen by skeptics as overextended. It also faces increasing competition from the likes of Apple, Disney and NBCUniversal, all of which have introduced cheaper subscription offerings. WarnerMedia’s HBO Max, the last of a handful of well-funded competitors, launches Wednesday at a higher list price than Netflix, $15 a month.
Netflix “remains in ‘land-grab’ mode,” Giaimo believes, meaning it is spending at many times the level of its rivals, plowing cash from subscription gains back into its massive content pipeline. Focusing on the company’s free cash flow, which had been negative until recently, is not the best way to assess the company, the analyst argues. “At some point in the future, OTT will evolve into a mature competitive marketplace, at which point margin scrutiny will make more sense,” he wrote.
The company anticipated the broader changes in the media sector, which is dramatically shifting toward streaming, though many legacy media companies are encumbered by 20th Century assets. “Linear competition is hurting, and the lack of sports is resulting in significant advertising pressure,” Giaimo wrote. “The media paradigm has shifted. Netflix now gets the first look at acquiring content rather than the last, a significant go-forward advantage.”