Netflix (NFLX) Has 50% Upside Potential, Says William Blair; Analyst Raises Rating to 'Outperform'

August 24, 2016 4:11 PM EDT
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Price: $132.89 -0.61%

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    33 Buy, 22 Hold, 10 Sell

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(Updated - August 25, 2016 11:53 AM EDT)

William Blair upgraded Netflix (NASDAQ: NFLX) from Market Perform to Outperform. Analyst Ralph Schackart said the company's advantage in original content and millennials is "underappreciated," and he sees roughly 50% upside in the stock. Schackart also sees favorable risk/reward, with that the stock off 17% year-to-date, while the broader Nasdaq Composite Index is up 4.7% and the S&P 500 is up 6.8%.

"Despite concerns about domestic subscribers in the recent quarter, we believe that Netflix will benefit as its 70 million-plus audience of nonpaying, often younger users transition to ages at which they become more likely to pay for Netflix," said Schackart. "If Netflix can convert 3% of this audience to new subscribers annually, we estimate the company could add 5.3 million domestic subscriptions by 2020 through this demographic lift alone. The results of our survey, which specifically assesses which age groups are more likely to pay, show that the percentage of existing Netflix users paying for their account increases by nearly 60% between the age ranges of 15-19 and 25-29."

The analyst continued, "Based on our detailed domestic subscriber build that includes a millennial conversion effect and growing OTT adoption, we believe Netflix can add 17.7 million net subscriptions by 2020, which is about 17% above the consensus estimate."

Schackart added that William Blair's extensive benchmarking analysis showed that Netflix’s original content is underappreciated.

"We believe that exclusive, original content will increasingly differentiate Netflix from its peers. After analyzing nearly 600 original content review scores across eight networks, we believe Netflix’s lineup of originals is superior to the networks from our sample (including HBO). Our research shows that Netflix has nearly double the above-average original series still releasing new content (15) than the networks next in line, including HBO (8) and Showtime (6). Further, Netflix’s running above-average series are over a full season fresher than HBO’s and Showtime’s, on average. Also, we believe the company has a unique sequel opportunity going forward."

William Blair's base case potential value per share is $145, its bear case is $110, and its bull case is $185.

For an analyst ratings summary and ratings history on Netflix click here. For more ratings news on Netflix click here.

Shares of Netflix closed at $95.94 yesterday.

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