Thursday, May 24, 2018

Why Netflix Hit All-Time Highs, More To Go

Netflix stock just broke out to new highs. We've been bullish and think there's more to go. Our 12 month upside target is $650. That would be another 88% upside from here.  Global business momentum has the revenues accelerating which causes our earnings targets to go nuts and are much higher than the Street.

Why New Highs?

Everybody may be reporting about Netflix valuation or how it's too expensive. It's not.  It's earnings story has accelerated catching up to it's valuation. That's why the stock is working.

Accelerating Revenues

Revenues have been accelerating which make any company's numbers look good.

Let's see.

We look at growth rates two ways; both one-year and two-year.


2017 2017 2017 2017 2018

Q1 Q2 Q3 Q4 Q1A
Rev Gr YOY 34.7% 32.3% 30.3% 32.6% 40.4%
2yr growth 59.1% 60.3% 62.1% 68.5% 75.0%

Here you see the one year growth rate jump last quarter to 40%. But if you were only looking at the one-year you would not have caught that move ahead of time.

Source
We went to a Buy rating in January for subscribers (here) because we saw the two-year revenues accelerating.

Above you see "2yr growth" go from 58 to 59 to 60 to 62 to 68 to 75% last quarter. That's how you caught this move.

The two-year simply looks at this year's revenue growth plus last year's same quarter revenue growth. It's a simple tool that smooths out one-timers.

That's what made our earnings numbers go berzerk because when you have an acceleration you have to model that continuing.  And for Netflix it's easy to picture their continued global roll-out especially in Asia help that acceleration continue.

Our EPS Way Higher Than The Street

So if you assume the business continues our model works out to $6.50 in earnings for next year. We're about $2.00 higher than the Street for 2019.  If we're right, guess which way the stock's going.

We're using a 100 PE which, compared to its 2-400 PE it's traded at, is conservative.

Conclusion

Who doesn't love all-time highs. The shorts I guess. But Netflix turned into an earnings story for us in January and we guess it gets better. That's why we think the stock's breaking out to new highs.




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