Barclays is Positive on Netflix (NFLX) as Growth Continues

Netflix’s (NASDAQ: NFLX) subscriber growth has been very strong over the past year. In Barclays’ opinion, this has been because of factors that may be tough to replicate. Netflix’s content agreement with Disney began in the 4th quarter of 2016. Given that Disney movies have accounted for 26% of the box office in 2016, this likely was a tailwind over the last year. The company also benefitted from the launch of its biggest show to date, Stranger Things.

The company’s pricing power over the last 3 years has been obvious with the company raising prices in the US by ~10-12% for new subscribers and still seeing 40% growth (from 2014-2017E). The period that Netflix implemented its price increase has also coincided with an increase in the pace of cord cutting in the US and an increase in the penetration ofc onnected devices. Barclays believes it is quite possible that over this period, consumers disconnected cable and effectively tiered down to self-made bundles, which was not possible to do until recently.

Analyst Kannan Venkateshwar believes that the biggest driver of pricing power in media is inertia. Inertia in turn could be driven by the perceived value of being able to pick and choose content as desired, even if very few actually use that option. Barclays believes these factors are as likely to be a tailwind for Netflix as they have been for other forms of media.In Venkateshwar’s opinion, for younger demographics, Netflix is likely to become a must have ‘network’ similar to the way broadcast is perceived by those consuming content primarily on legacy media.

This year (2018), Netflix expects to spend $10-$12bn in cashon content. Beyond this, the company has $17bn in content liabilities. The company’s borrowings in the next couple of years could be more than its annual debt increase over the last three years despite growing contribution margins domestically and no major new market additions. Barclays believes this model is manageable at present in the context of the company’s present growth rates.

Barclays initiated Netflix Inc. with an Overweight rating and a $245.00 price target.

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