Content Leverage is Biggest Opportunity for Netflix (NFLX) Shares to Outperform - Morgan Stanley
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In a note sent to clients today, Morgan Stanley analyst Benjamin Swinburne shared key takeaways from the firm’s deep-dive into Netflix (NASDAQ: NFLX) and the overall streaming industry.
Swinburne, who rates Netflix as Overweight with a $700.00 per share price target, argues that the key to the firm’s $900 12-month bull case is long-term operating leverage. Consensus currently forecasts 2024 EBITDA margins of ~30%.
On Netflix shares valuation, the analyst wrote:
“It is the right time to focus on potential long-term profitability both for Netflix and the broader Media sector for three reasons: First, NFLX shares are trading above their average historical EV/sales range despite decelerating revenue growth. This highlights the important role of margin driven earnings growth to the stock. Second, NFLX shares have historically performed better when it is showing clear content cost leverage. Third, the relative value of NFLX shares vs.s streaming competitors has never been higher, suggesting the market sees this as an industry with limited overall earnings potential.”
Content leverage is also the key and it offers the biggest opportunity for the NFLX shares to outperform, while also offering hope to Netflix’s competitors to excel.
“Content is by far Netflix's largest area of annual investment with content amortization running over 40% of revenues and total cost of revenues nearly 60%. Climbing above these 40% gross margins is key for Netflix to achieve the level of EBIT margins we have seen in scaled TV businesses of the past. Prior cycles have seen TV network businesses and scaled US cable operators achieve EBIT margins above 30%. Said differently, if Netflix cannot achieve better than 40% gross margins, what hope is there for everyone else?”
Overall, the analyst expects Netflix to experience fading COVID impact, as well as leverage international production to raise its gross margin and ultimately help its shares to outperform.
Netflix shares are up half a percent today.
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