Netflix Inc. (NASDAQ:NFLX) shares rose strongly on Monday morning to cross $700 after Goldman Sachs released a report praising the firm’s “superior distribution model” and outlining a simple framework for the success of the firm going forward. The analysts said their clients should Buy shares in the firm with a price target of $780.
That target was explained by Heath Terry, Goldman’s analyst in charge of Neflix research. He said that “margins should exceed those of comparable traditional content distributors” as it grows its revenue in the months and years ahead. Netflix will release its earnings numbers for the three months through June after the market closes on July 15.
Netflix model is superior
Heath Terry outlined a number of ways in which the Netflix business model will allow it to run faster and move quicker than the cable firms it is now competing with. The firm’s “superior distribution model,” which carries a lower cost than cable, will ensure higher margins says Terry. That in turn will allow the firm to spend more in key areas.
Those spending targets include marketing and content. Because Netflix really knows its users, the firm should be able to use the data it has on hand in order to make the content it decides to publish, and the ads it decides to sell that content with, more targeted than anything made possible by the cable firms already in the space.
Terry presents that model of constant revenue increase and re-investment to battle cable firms as an almost logical necessity given Netflix’ position in the market today. There is an “increasingly fixed nature” of content costs right now, says the report, and that will keep margins high for a long time to come.
Goldman is looking for the operating margin at Netflix to hit 19 percent by 2020. That number sits at 6 percent right now.
Focusing on global growth
Goldman Sachs isn’t the only one doing bullish research on Netflix, thought the investment bank’s name carries a lot more weight than most of the research houses that have put out reports on the firm in recent weeks.
Last Friday saw another big Wall Street bank, this time Morgan Stanley, released its outlook for the firm in the months ahead. Benjamin Swinburne, who wrote that report, said that he thinks the firm’s stock is heading to $750 and he’s telling clients to go Overweight on shares.
Mr. Swiburne said that Netflix would focus on global growth in order to push earnings in the long term. He added that there’s risks of that growth being slowed by poor broadband infrastructure in places like India and China.
Global expansion into Asia not going to help the firm this week as it heads into the release of earnings for the three months through June.
Netflx heads into earnings
On Wednesday July 15, after the market closes on Wall Street, Netflix will show off its earnings for the second quarter of 2015. Analysts are looking for the firm to show earnings of around 30 cents per share by consensus. Revenue is expected to come in at $1.65bn.
Earnings for the coming quarter, and for the full year 2015, are expected to come in lower than the comparable figures from 2014 because Netflix is investing in the kind of global growth that Mr. Swinburne thinks is going to drive revenues higher in the coming years.
Mr. Terry reckons that spending in the short term will only assure higher margins going forward. His thesis is built on the assumption of a 24 percent global penetration rate in 2020. The “opportunity in shares of Netflix remains compelling,” he wrote. If those assumptions are true, there’s no wonder traders are buying shares at all time highs this morning.