- RBC capital analyst Mark Mahaney recently came out with a bullish call on Netflix Stock.
- Netflix stock price is down over 15% in the year-to-date, with multiple investor concerns dragging the stock.
- Should investors buy into the latest bullish call from RBC Capital's lead internet analyst?
RBC capital markets analyst Mark Mahaney recently issued a bullish Netflix Inc. (NSDQ:NFLX) call. This comes in the midst of what has been a horrid time for Netflix stock. The stock has lost 17.8% in the year to date, underperforming the Nasdaq Composite (INDX:COMPX), which has gained 4.74% in the same time. The underperformance has been in stark contrast to the 135% gain by Netflix stock in 2015, which was a 130% outperformance compared to the Nasdaq composite. So what exactly has brought about this cruel turn for Netflix stock? And, should you buy into the bullish call from RBC capital's lead internet analyst?
Netflix Stock Will Double In 3 Years
In what came as a much-needed reprieve for Netflix stock, RBC capital's Mark Mahaney picked the online streaming leader to outperform over the next 3 years. The analyst pointed out that Netflix has been the biggest underperformer among the FANG (Facebook, Amazon, Netflix, Google) stocks in 2016. Facebook Inc. (NSDQ:FB) stock, up over 22% in the year to date, leads the pack of FANG stocks, followed by Amazon.com (NSDQ:AMZN) stock with a 19.2% rise and 4.75% gain by Google parent Alphabet Inc. (NSDQ:GOOGL). The 17% drop in Netflix price is a huge underperformance compared to the other FANG stocks.
Talking on CNBC's 'Squawk Box' show last week, the internet analyst said that Netflix stock price could double over the next 3 years. As per CNBC:
"It could be a double in three years," he contended. "We think this thing can generate $10 in earnings [per share], GAAP earnings, by 2020. We think the market would put a 20 [price-earnings] multiple on something like this. We think it could be a $200 stock."
So what exactly will drive the Netflix stock higher? As per Mahaney, subscriber growth will be the key metric powering this growth. Quoting from the source:
"We think it's going to double to be 150 to 160 million [global] subscribers in a couple of years."
So, can Netflix achieve the expectations set forth by the latest bullish call? Should investors buy into this call?
Problems Dogging Netflix stock
Subscriber growth has been one of the key worries for Netflix investors. With the stock trading based on the subscriber growth, the Q2 subscriber addition miss didn't go down well with investors. Netflix added just 1.8M new subscribers in Q2 2016, below its own expectations of 2.5M additions. The subscriber additions in Q2 were the lowest in the last 12 quarters.
Another constant worry nagging investors has been the capital intensive investments into original programming. The capex heavy investments which have to be made upfront have dragged Netflix's free cash flow to worrisome levels. Netflix's TTM (Trailing Twelve Month) Free cash flow has been on a constant decline and is now down to -$965.5M. Whats more worrying is that the TTM Free cash flow has been negative for the last 7 quarters.
Can Netflix Stock Breach The $200 level?
Coming back to the bullish call from Mark Mahaney, the analyst expects Netflix to report GAAP earnings of $10 in 2020. Netflix reported GAAP EPS of $0.28 for FY 2015, which means that the company needs to grow its GAAP EPS at a rate of 104% over 2016-2020 in order to reach Mark's target of $10 in 2020. To put things in perspective, Wall street expects Netflix earnings to grow by 54% over the next 5 years.
Also read: Why Netflix Inc Stock Is Not A Good Buy Now
The bullish call from Mark Mahaney couldn't have come at a better time for Netflix stock. However, considering the steep valuations at which Netflix stock currently trades (PE ratio near 300), it's hard to see the stock outgrow these valuations. Also, it looks extremely difficult for the company to achieve Mark's EPS target for 2020. Hence, buying Netflix stock at these steep valuations would still represent a huge risk in our opinion.