Is now the time to invest in Netflix (NFLX)? There are several reasons to think not. WFH stocks – to which belongs by dint of benefitting from the pandemic-driven trend – are out of favor as normal times are almost here again. What’s more, summer is at the gate, and people will be outside and consume less content.
However, these are just short-term overhangs, according to Jefferies analyst Andrew Uerkwitz, who claims “timing is everything.”
So, why is the timing right to pull the trigger on NFLX shares? Well, Uerkwitz believes the fact Netflix is now turning the corner towards “positive FCF (free cash flow) and return of capital” positions it as the “premier, must-have OTT service.”
“Significant FCF will allow NFLX to prime its original content pump, capitalizing on existing momentum and fragmentation in the market,” the 5-star analyst explained. “Over the next 5 years, we see >$100B in content spend, ~$17.5B in FCF, Net Debt of less than $2.5 billion and $12 billion of buybacks.”
Furthermore, Uerkwitz thinks there are three guiding factors to consider when contemplating an investment in Netflix.
The first is competition, which has become ever fiercer in the streaming space as new offerings have entered the market. However, when forced to make a choice between “other forms of entertainment and subscriptions” and Netflix, Uerkwitz expects the streaming giant to hold “its premier position.”
The second factor is scale. Here, the analyst thinks having over 200 million subscribers provides Netflix with 2 clear advantages. “The probability of IP going viral is very high and little marketing cost is required to make it happen. And building localized content becomes a misnomer as good content travels well across borders,” Uerkwitz opined.
The third aspect to consider is the prospect of “other monetization.” As growth inevitably slows down, there comes the need for “ancillary revenue streams.” One possible avenue is getting its new content on other streaming platforms. But there’s another route for “leveraging its IP.” And here, Uerkwitz thinks Netflix is set to pull another fast one on the industry it turned upside down with its revolutionary agenda in the first place. The analyst thinks Netflix originals could be coming to the big screen soon. And the company has the spending power to go toe-to-toe with the big studios.
“Despite using popular 3rd party content to build its subscriber base and achieve economies of scale, NFLX is now in a position to self-fund an original content offering that rivals the entire TV/Movie industry combined,” the analyst confidently said.
Based on all of the above, Uerkwitz initiated coverage of Netflix with a Buy rating and $620 price target. The implication for investors? Upside of ~24% from current levels. (To watch Uerkwitz’ track record, click here)
Does the rest of the Street share Jefferies’ enthusiasm? The stock currently boasts a Moderate Buy consensus rating based on 26 Buys vs. 5 Holds and 4 Sells. The average price target comes in at $599.91, suggesting one-year upside of ~20%. (See NFLX stock analysis on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
