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Why one analyst thinks Netflix will rise another 67% in the next few years

  • Rob Sanderson of MKM Partners raised his 12-month price target on Netflix to $195 before Thursday's bell. The tech giant rose more than 3 percent to close at $163.

  • But if the analyst is right in his long-term call, the stock has even more substantial gains ahead than his current price target implies.

Soaring shares of Netflix are set to stream even higher, according to Rob Sanderson, a research analyst who covers the stock for MKM Partners.

Ahead of Thursday's bell, Sanderson raised his 12-month price target on the then-$158 stock to $195. His bullish report appeared to put a bit more wind in Netflix's sails, as the tech giant rose a bit more than 3 percent in the session to close at $163. But if the analyst is right in his long-term call, the stock has even more substantial gains ahead than his current price target implies.

To be sure, his target change did not rest on any massive reworking of expectations. Actually, the methodology that leads to his $195 price is almost pleasantly clinical.

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Sanderson continues to expects the stock to earn $12.12 per share in 2021, and to trade at a forward price target of 22.5 in 2020 — leading to an expectation that the stock will trade at $273 in two and a half years' time. He expects investors to "discount" this price by 25 percent for every year in the future it is (as a way to be compensated for the risk of Netflix not achieving those earnings and/or multiple).

At the end of January, when Sanderson slapped his prior one-year price target on the stock, one year from then was about two years away from 2020 — so $273 was divided by 1 plus 25 percent, raised to the second power. Now, a year from now is about a year and a half from 2020, so $273 is divided by 1 plus 25 percent, raised to the 1.5st power. Hence the price target moves from $175 to $195.

This simple arithmetic can cause one to forget the fact Sanderson is forecasting that Netflix's earnings will explode from about $0.50 in 2016 to more than $12 in five years' time. And to further forecast that even after the stock does so, investors will still be sufficiently optimistic about future profits to slap a high earnings multiple on the company.

Sanderson said in an interview Thursday on CNBC's "Power Lunch" that the company has "more than ample opportunity to continue to scale up [its] content investment on a global basis," and that "the subscriber opportunity is sufficiently large."

While some might be tempted to bet against such heady expectations, Dennis Davitt of Harvest Volatility Management uses the harshest language to warn against doing so.

"I've seen a lot of really good investors lose a great amount of money on stocks like Netflix, and that usually comes from when they short them," Davitt said Thursday on "Power Lunch." "It's a momentum stock."

However, Davitt says it would be prudent for Netflix investors to buy a downside put on the stock, in order to maintain their upside while protecting themselves from the potential for great downside.

"I think Rob's right, personally," he said. "But if Rob's not right, it costs you 5 percent to own the 'insurance policy' on the stock."

Netflix is up more than 30 percent year-to-date.

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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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