Bull Case Suggests Netflix (NFLX) Is Worth $800/Share or More - Anayst

Shares of Netflix (NASDAQ: NFLX) are lower Tuesday (-1.8%) as investors react negatively to a downgrade at Stifel. However, comments from another analyst may be more telling and are clearly more bullish. Citi's Mark May said a new country-level model and sum-of-the-parts valuation analysis suggests significant upside.

Looking at the upside based on the firm's new country-level model, May notes that Netflix has the potential to be a significantly larger bushiness than it is today. The analyst notes Netflix’s existing markets have over 275mn broadband households in total. In addition, they expect the company to launch in additional new markets in 2015, which will bring the addressable broadband households number to 350 million by 2015 year end.

May said considering that Netflix has achieved 43% penetration of the broadband households in the U.S. and 34% in Canada, and considering the popularity of Netflix's U.S.-centric content library in most countries outside the U.S., the potential for penetrating the addressable households and building a much larger subscriber base than it has today is material.

"Using our framework of potential OTT penetration by country, we estimate a best case scenario worldwide subscriber base of 265 million by 2024," the analyst said. "In short, that assumes 27 markets representing over 750 million broadband households are launched by 2024 and that Netflix’s average worldwide penetration of addressable broadband households is 35% in 2024."

"Assuming this bull-case scenario in terms of subscriber penetration and revenue and earnings mulitples, one could derive an upside case for NFLX shares of north of $800/share," the analyst said. He added the caveat that even this may understate the upside case, as it excludes future potential markets (e.g., China, Russia, India, etc.), does not account for future price increases and ascribes no value for the company's DVD business.

While the firm notes the significant upside potential for NFLX. they remain on the sidelines as they need to get comfortable with: 1) the deceleration in domestic sub growth in 3Q14 is not a new trendline and that sub growth can stabilize, 2) that the international sub result in 3Q14 and guidance for 4Q14 doesn't reflect disappointing early traction in recently launched countries, and, to a lesser degree, that 3) the company still has pricing power despite mgmt commentary in 3Q14. In addition, the firm notes that Google Trends data (which has shown a high correlation to Netflix’s sub adds) suggests 3Q14 trends have not shown improvement QTD and that these questions may not be resolved in 4Q14. Therefore, the firm is maintaining a Neutral rating and price target of $364.

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

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