Will Netflix Go to $65 or $325? Analysts Debate
Netflix is the year's best-performing stock in the S&P 500, but some analysts couldn't disagree more about the company's valuation. Two top analysts squared off Monday on CNBC on where they think the stock is headed.
"Our thesis on Netflix is that this company is a television network company, and if you believe that, their margins are going way up over the balance of this decade, the earnings per share will be going way up. The market is starting to understand that," said Barton Crockett, analyst at Lazard Capital Markets. Crockett holds a $325 price target on the stock with a "buy" rating.
"This is a company that will look a lot more like HBO by the end of this decade," he said on CNBC's "Squawk on the Street."
"That's what people are buying today and I think you can buy into it."
HBO is a premium cable and content production subsidiary of Time Warner.
Crockett's price target is based on a valuation of Netflix as cable company, assuming a $1.50-$3 in EPS accretion per year over the next 10 years. The revenue multiple for this company should be around 4 for domestic and a "fraction of that" for international, he said.
On the other side, Wedbush Securities senior analyst Michael Pachter holds an "under-perform" rating on the stock with a $65 price target.
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Pachter said that by looking at the company as a "sum of the parts," a significantly lower valuation—1 times revenue—is justified. "What Barton and the investing public seem to misunderstand is that profit is calculated by taking revenue minus expense. We know expenses are going up."
"The market seems to be taking that leap of faith that once expenses go up, revenues will necessarily follow," he said. "The fact is these guys don't control their expense structure at all. The content owners want more money and Netflix's only recourse is going to be to raise prices. When they do that, their growth is going to slow."
"I think you've got a profitable, slow growth company that's worth about 1 times revenue, or an unprofitable high growth company that is worth less," he said.
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Pachter also dismisses the idea that Netflix generates its own content, like HBO, and thinks this is a red herring for investors.
"Someone else produces content, Netflix buys exclusive rights for a very limited period of time and then Netflix doesn't own the content anymore," he said. "This is not the same as the HBO model. They are nothing like HBO. They have a three-year window to show 'House of Cards.' After that nothing. They don't own it, they can't exploit it further unless they pay more. That's not ownership of content."
"People overvalue the domestic streaming business and they discount the fact that the domestic DVD business is all of their real profits, and that is going away," he said.