PhillipCapital has initiated coverage on Netflix with an “accumulate” recommendation and a target price of US$742 ($1,001.42).
In its report dated Oct 15, analyst Jonathan Woo highlighted that Netflix is seeing a continuing trend of positive net paid additions.
In the FY2020 ended December, Netflix ended the year with 204 million paid memberships, 22% higher y-o-y from that of the FY2019.
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Paid memberships increased with a compound annual growth rate (CAGR) of 23% over the past four years.
“We expect growth in paid memberships to dip slightly in FY2021 to 9%, largely due to tougher pandemic comps last year,” says Woo.
Next, Netflix’s results in the FY2020 have shown expanding net margins and positive fixed-cost structure (FCF) for the first time.
“The expanding net margins are due to NFLX’s fixed-cost structure where most of their costs – content costs, are incurred upfront regardless of the number of memberships,” notes Woo.
The positive FCF is seen as a “significant milestone” for the company as they turn the corner on profitability, he adds.
In addition, there is a large potential for growth with only 20% household penetration globally.
“There is [also] a robust global mobile broadband market that Netflix can further address as a secondary channel for distributing its services – particularly for customers that do not have broadband or pay TV at home,” says Woo.
“Netflix is also in the incubation stage of developing a new avenue of content – gaming, to complement its existing streaming experience,” he adds.
To this end, Woo is “very bullish” on Netflix’s ability to continue its growth trajectory.
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This, he says, is supplemented by its healthy underlying business metrics in paid net membership additions and average revenue per membership (ARM).
The company is also generating more value for its consumers, including plans to launch at least one new original film per week in FY2021.
“Netflix has also established itself as the premier streaming service amongst its peers, which we believe they are well equipped to maintain. We are also very positive about Netflix’s subscription pricing power, as the company was able to grow its paid membership numbers even with subscription price hikes in 4QFY2020,” writes Woo.
Shares in Netflix closed US$9.68 higher or 1.54% at US$637.97 on Oct 18.
Photo: Bloomberg
