Shares of Netflix (NFLX) rallied on Friday morning after both UBS and Raymond James told investors to buy the stock. UBS said that after six months of underperformance, it thinks that the stock will rise as subscriber numbers grow, while Raymond James said the company is approaching a "profit inflection."
UBS 'TAKING THE BLINDFOLD OFF': Netflix on Thursday night was upgraded to Buy from Neutral by UBS analyst Eric Sheridan, who said he is "taking the blindfold off." "After six months of stock underperformance & key debates emerging about competition, margins & free cash flow, we think these debates are better understood by investors and reflected in the current stock price," Sheridan said in a research note to investors. He contended that "With content spend now at a scale of the major media companies and titles continuing to demonstrate outsized marketplace success, we see the moat around Netflix's global positioning widening and its long-term secular winner status remaining intact." The analyst sees share upside over the near-to-medium term to subscriber growth, adding that current subscriber metrics such as growth, churn, spend and consumption are tracking inline to better than management's Q4 guidance and commentary, according to his firm's Evidence Lab.
RAYMOND JAMES SAYS NETFLIX 'APPROACHING INFLECTION': Raymond James analyst Justin Patterson upgraded Netflix to Strong Buy from Outperform, telling investors in a research note of his own that Netflix is "approaching a profit inflection." "Coupled with positive app/search data and a solid content slate, we believe there is an upward bias to 2020E revenue and EPS," he said. Given underperformance in the second half of 2018 vs. traditional media, Patterson said he believes that the combination of positive revisions and emerging signs of long-term profit potential will yield share price outperformance. Additionally, Patterson noted that his survey work has shown Netflix's traction in film is helping it gain share against linear TV and he sees meaningful potential for Netflix to succeed in film, which Patterson believes should aid subscriber growth, retention and pricing power. He also noted the 45M unique viewer number from the movie "Bird Box," which highlight "Netflix's advantages in film; convenience, cost and global distribution."
MORGAN STANLEY SAYS PRICING POWER 'INTACT': Meanwhile, Morgan Stanley analyst Benjamin Swinburne lowered his price target on Netflix shares to $430 from $475 to factor in his "modestly lower" view on long-term margins and the broader de-rating of the stock in the market. While he currently forecasts 27M global paid net adds in 2019, Swinburne has tempered his 2019 ARPU growth view, noting that Netflix has not implemented broad price increases as of yet. He still believes Netflix's long-term pricing power remains intact, though he is now taking a more conservative approach to ARPU growth in emerging markets longer term. Swinburne kept an Overweight rating on the name, citing the nearly $500B global TV market it has the potential to address and his view that while many traditional TV studio owners, like Disney (DIS), will pivot to streaming, most likely will not. The analyst added that "The shift toward life as a vertically integrated streaming business is accelerating, evident in a declining level of licensing obligations to 3rd parties and a ramp in spending on originals.This should translate into 1) a deeper moat, 2) greater operating leverage, and 3) meaningful free cash flow long-term."
PRICE ACTION: In early trading, shares of Netflix are up 1.8% to $330.49.