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If Netflix Can Stay King of Streaming, it's a Buy

Video Credit: The Street
Published on September 26, 2019 - Duration: 01:22s

If Netflix Can Stay King of Streaming, it's a Buy

Now may be the perfect time to buy Netflix shares for those who believe the entertainment streaming giant can remain king in streaming.

The stock is down 30% to $264 a share since just before its disastrous second quarter earnings report.

Some analysts have said to buy the dip, and Stifel analyst Scott Devitt -- whose $400 price target represents 51% upside -- laid out the ultimate bull case on Netflix in a note out Thursday morning.

"We expect the scale and breadth of Netflix's series and film library will remain highly attractive for subscribers in a world where the consumer can effectively rebundle the cable package with two or more SVOD subscriptions (ex-sports)," Devitt said.

"Netflix winning the scale game; pricing power remains." In the second quarter, Netflix missed subscriber addition estimates badly, posting a net add globally of 2.7 million against Wall Street's estimates of 5 million.

Management attributed the elevated levels of subscriber churn to higher its prices, a seasonally rough second quarter and lower-than-expected content acquisition.

Devitt sees those points as both "mostly reasonable," but also "transient." With a strong slate of new content coming in out the second half of the year, including new episodes for Stranger Things, Devitt is looking for strong results in the third and fourth quarter.

Netflix reports its third quarter results on October 16.

Devitt is looking for subscriber additions in its ever-important international market of 8.56 million, above consensus estimates of 8.03 million.

As Netflix looks to move towards being free cash flow positive, which isn't expected until later than 2021, management is looking to expand the operating margin to 19% in 2021 from 13% expected in 2019.

Some of this would come through strong pricing.

While Apple's Apple TV Plus and Disney's Disney Plus aren't expected to match Netflix on amount of content soon, once they do, Netflix's pricing could be threatened.

Apple and Disney are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio.

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