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Does Netflix Have Room for Further Upside in 2018?

Zacks

On Tuesday, Netflix, Inc. NFLX hit its third successive all-time high of $325.27. The streaming video giant had already enjoyed a strong showing on Monday, powered by its second-ever Oscar win for the documentary Icarus. In contrast, other major media names mopped up only meager gains despite garnering multiple awards.

More importantly, shares of Netflix have surged nearly 70% year to date, edging out larger tech names like Amazon AMZN, Apple AAPL Microsoft MSFT and Alphabet GOOGL, which have gained only 31.5%, 4.4%, 9.1% and 4.5%, respectively over the same period.

But does the stock’s price have further room for improvement in the days ahead? A wide swathe of analysts believes that the stock has the potential to move even higher in 2018. A carefully built up competitive moat and the rapid adoption of ultra-HD content are some of the reasons that could fuel Netflix’s ascent in the days ahead.

Oscars’ Biggest Winner?


On Monday, Netflix’s stock gained 4.6% after it picked up its second Oscar in the documentary category. The prestige factors must surely have added to the sheen of the stock since the real big winners on Academy Awards night had little to show for their efforts in terms of price gains.

Disney DIS, Time Warner TWX, Fox FOXA and Comcast’s CMCSA Universal all picked up multiple awards. But each of these companies’ shares failed to increase more than 1% on Monday during a session when the Dow gained nearly 1.5%. Meanwhile, Netflix notched up another 3.2% gain on Tuesday. Netflix has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Moat, Ultra-HD Adoption to Drive Upside

Of course, there is another section of analysts which believe that movies are only incidental to Netflix’s larger game plan, give its massive library of original content, Netflix is planning to spend almost $8 billion on producing its own content in 2018. This is a substantial jump from the $6 billion that it spent on content in 2017.

Analysts at UBS AG UBS believe that investment in original content is one of the major factors which have helped Netflix to build a formidable competitive moat. And this moat is one of global proportions. Going forward, analysts at the Wall Street firms think that Netflix has created a virtuous circle for itself since its international success reduces the incremental cost of acquiring and servicing fresh subscribers.

This is UBS has revised its price target for Netflix upward, from $290 to $345. Meanwhile, analysts at Macquarie have revised their Netflix price target higher for a completely different reason. This firm believes that the widespread proliferation of ultra-HD content will help Netflix gain further headroom.

Since Netflix charges a $4 premium over its standard service for ultra-HD content, this is likely to result in higher revenues. On Monday, Macquarie’s 12-month price target stood at $330.

Does Netflix Sport Sufficient Upside?

With the stock gaining a searing 69.4% year to date, the only factor working against it at this point is valuations. With a PEG ratio of 4.06, Netflix is clearly pricier than the S&P 500, which has a PEG ratio of 1.81.

However, its median PEG ratio over a five year time span is 5.08. Additionally, it high a peak PEG value of 23.60 during the fourth quarter of 2015, which means that it remains pricey but has further room to run.

Also, the ongoing market rally has dispelled such concerns over valuation time and time again. Tech majors have delivered ever stronger earnings performances, as was in evidence during Netflix’s fourth quarter results, to justify such exorbitant valuations. The company added 8.3 million subscribers (highest in history), much more than the expected 6.3 million, which shows how attractive its portfolio is to consumers.

In Conclusion

Over the last three months, Netflix’s Zacks Consensus Earnings estimate for the current year has increased by 19.3%. Additionally, its expected earnings growth for the current year is more than 100%. Meanwhile, its stock remains pricey but well below its peak or even median valuation levels over a five year span.

Given these factors, Netflix is likely to surge even higher in 2018 on the back of its strong original content and international subscriber additions. This makes it a great option for investors going forward.

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