It’s easy to understand why regular investors get excited about Netflix, Inc. (ticker: NFLX) stock — but when veteran Wall Street analysts start getting giddy, it’s time to pull up a chair and pay attention.
Exhibit A is UBS analyst Doug Mitchelson, who, on March 6, forecast a share price hike on NFLX from $139 to a whopping $175 per share over the next 12 months (the stock is trading at about $140 per share, up from $128 at the start of 2017.)
Mitchelson, who upgraded Netflix from “hold” to “buy,” had this to say about the video streaming giant in a new research note: “We believe Netflix’s core competencies in both content and technology will drive a virtuous circle of greater subscribers and increased viewing time, enabling ever higher average-revenue per user and revenue, which can fuel content spending to attract even more subscribers, and so on, positioning Netflix to sustain its position as the clear global leader in the emerging online video-subscription business.”
[See: 10 Important Investments Before Having a Baby.]
At 94 million global users through 2016, Netflix is growing fast as the term “cord-cutting” becomes part of the cultural lexicon. But a share price of $175 by 2018 — is that for real?
Apparently so, other market mavens say.
“Netflix is a raging bull on fire,” says Eric Schiffer, chief executive officer at The Patriarch Organization, a private equity firm, in Los Angeles. “Their CEO, Reed Hastings, is the boldest visionary in content today, and has the quintessential mix of guts, taste and savvy. He’s created audiences who basically have IVs hooked up to Netflix’s smash-the-mold programming.”
Schiffer says Netflix’s content keeps improving and its domination in international markets is growing “faster than Alexander the Great.”
“Netflix’s bigger push into reality is bold and will pay off with several smash hits and inroads to new customers and cult-like loyalty,” he says.
But a deeper dive into the numbers reveals several red flags that could threaten Netflix growth potential, says Brent Wilsey, a 30-year Wall Street investment veteran, and owner of Wilsey Asset Management in San Diego.
“Netflix provides a lot of excitement when it comes to subscriber growth and expansion across the world,” Wilsey says. He notes sales growth of 30.3 percent over the last 12 months and earnings-per-share growth of 51.5 percent over the same time — a performance “that also excites investors.”
“While these are impressive numbers, it’s important to understand what we are paying for Netflix stock,” he says. “The current P/E for the company is 332.49 versus an industry average of 21.03. Price-to-sales ratio is 6.89 versus, an industry average of 2.53. Plus, there is no tangible equity in the company as it has $7.3 billion in intangible assets on the balance sheet.”
That scenario concerns Wilsey, as intangible assets can be hard to measure and may result in writedowns against earnings down the line.
“The balance sheet used to be very clean for Netflix, but now there appears to be some question marks,” he says. “A current ratio of 1.25 is all right, but debt/equity of 125.5 percent is above levels we like to see.”
In addition, Netflix has borrowed a tremendous amount of money over the last couple of years. At the end of 2014, the company had just $885.9 million of debt on the balance sheet.
[See: 7 ETFs That Allow You to Invest in Space.]
“Now, fast-forward to the end of 2016 and it now has $3.4 billion of debt on the balance sheet,” Wilsey says. “Looking forward to December 2018, Netflix is estimated to have GAAP EPS of $1.98. If we use a forward multiple of 16.5 on 2018 estimated EPS we arrive at a target sell price of $32.67. That is currently well below the current price of $140.70. Due to the high valuations we would place a “sell” on Netflix.”
But if you believe in game-changers that transform entire industries (and create emerging ones with huge potential), Netflix is at least certainly worth a look.
“NFLX is a disruptor to the media space, much like Tesla ( TSLA) is to the auto space,” says Michael Kramer, a portfolio manager at Covestor, the Boston- and London-based online investing company, and president of Mott Capital. Kramer currently holds Netflix in the Covestor Thematic Growth portfolio and covers the company closely.
Kramer says NFLX is “changing the way” viewers receive and watch content today.
“NFLX can create its content or license content, which gives it a tremendous advantage over traditional media players,” he says. “Plus, the international stage for NFLX is even bigger than the U.S. opportunity, multiple times bigger.”
As a game-changer, Netflix offers investors sustainability, too, Kramer says.
“Give a 5-year-old a Roku remote and a subscription to Netflix and watch with amazement how the child not only will dominate the programming selection, but also how quickly the child can find what they want to watch without even needing to know how to read,” Kramer says. “These kids — the on-demand generation — are growing up finding what they want to watch with ease, whenever they want it, and without interruption. They’re forever reshaping the way we get our content.”
Ask a kid what NBC, CBS, or ABC are, they have no clue, Kramer says.
[See: 8 Ways President Donald Trump Will Affect Wall Street.]
“But ask about NFLX and watch their eyes light up and they will tell you about all their favorite shows, as Netflix has become ingrained into their everyday life,” he says. “The only question that remains is if any cable or networks will be left.”
More from U.S. News
The Best Energy Stocks to Buy for 2017
The 25 Best Blue-Chip Stocks to Buy for 2017
7 of the Worst Stocks to Buy for 2017
NFLX Stock: Why the Market Loves Netflix, Inc. originally appeared on usnews.com
