As I mentioned this morning, Pacific Crest‘s Andy Hargreaves today reiterated an Outperform rating on shares of Netflix (NFLX), while raising his price target to $225 from $160, arguing that the company can expand its subscriber base in the U.S. and abroad more than he thought previously, and at a better profit margin than he’d modeled.
Netflix shares today are one of the biggest point gainers, rising $10.35, or almost 6%, to $191.14, and as high as $192.64 at one point.
Hargreaves doesn’t mention competitors much in the report, although during this morning’s segment on CNBC he compared Netflix favorably with HBO, and of course Amazon.com‘s (AMZN) “Prime” instant video service is an obvious competitor as well.
Hargreaves leaves unchanged an estimate for this year of $4.27 billion in revenue and $2 per share in adjusted EPS. What he changed were his 2015 and 2021 numbers.
By 2015, he now sees Netflix hitting 46 million “peak” domestic streaming subscribers, up from 36 million expected this year, and higher than a prior estimate for 43 million.
Writes Hargreaves,
We consider our new price target to be relatively firm as the data that would be necessary to support upside to our target are likely to take more than a year to develop. As we look at the long-term assumptions in our model, we believe strong international subscriber growth or margin expansion have the most potential to drive upside, although we see some opportunity for Netflix to exceed our domestic subscriber estimates if the traditional cable bundle becomes more disaggregated.
For 2015, he now sees the company having 17 million international subscribers, up fro a prior 16.3 million estimate, and a “contribution margin” of 11.3% versus 10.1% modeled previously.� That’s on top of 36 million domestic streaming subscribers, unchanged.
For 2021, he sees the company reaching 40.8 million international subs, which is unchanged, but at a contribution margin of 26.5%, up from 19.6% previously.
Hargreaves argues Netflix is doing a better job than others of mining its database of information to shape content choices, and is delivering “real consumer value”:
Netflix�s massive database of viewing history should allow it to drive strong returns on incremental content spending in the form of further subscriber growth. We believe Netflix has more data on viewing behavior than any other premium video service. Strategically, we expect Netflix to use its information advantage to invest in high-quality original content where it will have the highest impact on users� perception of the service, while exploiting opportunities in third-party and niche content that can broaden the total addressable market. In this way, we believe Netflix will be able to improve the perceived quality of its offering as well as expand its consumer reach, which should allow it draw a much wider audience than any current premium video service [...] We believe Netflix�s current usage trends support our view that the long-term addressable market is significantly larger than for other premium services. We estimate the average U.S. Netflix streaming subscriber currently watches around an hour and a half of Netflix per day. At this level of viewership, Netflix costs the average subscriber less than $0.20 per viewing hour, which compares extremely well with cable, which we estimate costs the average U.S. subscriber over $0.50 per viewing hour. This large and growing advantage in entertainment value is likely to draw more consumers over time.
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