On-demand video content provider Netflix, Inc. (Nasdaq: NFLX) shot up yesterday after Goldman Sachs raised its price target by $100. The renowned investment management firm also reiterated its buy rating. The arguments provided by the analyst and the upwardly revised price target indicate that the stock of Netflix, which closed at $379.93 yesterday, will remain bullish in the short-term.
According to Heath Terry, the California-based company will see a reversal in the negative free cash flow from this year. In 2017, Netflix had a negative free cash flow of $2.02 billion. In fact, according to the analyst, this will be the peak negative free cash flow year for Netflix and the revenue growth will begin to outpace the money spent on content. Terry expects the negative free cash flow to hit a peak level of $3.06 billion in 2018, before reversing to negative $2.12 billion and improve further to negative $1.45 billion in 2020. By 2022, Netflix is expected to record a positive cash flow of $500 million.
Terry also expects content and marketing expenses to have a positive impact on subscriber additions in newer markets. Netflix aims to spend $2 billion on marketing. Goldman Sachs expects the company to add 34.2 million subscribers in 2019, versus the market’s expectation of 26 million and analysts’ estimates of 32.5 million.
Elaborating on margins, Terry stated that “~4pps of operating margin expansion for the full year, on our estimates, will allow the company to drive additional subscriber growth, particularly in markets where the company’s brand presence isn’t as strong as it is in the U.S.”
Netflix recorded a revenue of $11.69 billion last year. This represents a 32.4% y-o-y growth. Goldman Sachs has estimated that the revenue growth will exceed content expenses in 2019. The equity research firm expects Netflix to spend $14 billion this year on content. Based on these expectations, Goldman Sachs has reiterated its “buy” rating, while increasing its price target to $490, from $390, representing an upside of 30% from yesterday’s close. It is the highest target among 36 analysts who have covered Netflix.
Technically, the stock is moving along the ascending trend line, as shown in the image below. The stochastic indicator is in the bullish region, while the accumulation/distribution indicator is making new highs. Therefore, we are expecting the stock to rally in the days to come.
To gain from the uptrend, we are considering the possibility of investing in a call option, which is valid for a period of one week. Additionally, the stock of Netflix should be trading at about $380 in the Nasdaq. Provided, all other conditions of the contract offered by a binary broker are favorable, we will go ahead and invest in the call option.
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