Netflix Inc.’s (NFLX) good start to the year just got even better.
Shares in the video streaming service rose 2% in pre-market trading after UBS sided with the bulls by endorsing the company’s business model.
In a research note, reported on by CNBC, analyst Eric Sheridan said Netflix’s popular content and solid subscriber growth are helping to convince investors that the company’s heavy spending is paying off and should be enough to see off a rise in competition — two concerns that weighed on the stock toward the end of 2018.
Sheridan added that Netflix’s controversial cash burn, financed by billions of debt, has succeeded in creating a moat around the company that is steadily widening and becoming impenetrable. These developments, he hinted, should allay concerns that Walt Disney Co. (DIS) and AT&T Inc.’s (T) Time Warner, both of which plan to launch competing streaming services, will easily eat into Netflix’s market share.
“After six months of stock underperformance & key debates emerging about competition, margins & FCF, we think these debates are better understood by investors and reflected in the current stock price,” the analyst wrote. “With content spend now at a scale of the major media companies and titles continuing to demonstrate outsized marketplace success, we see the moat around NFLX’s global positioning widening and its long-term secular winner status remaining intact.”
Netflix’s moat, coupled with a surge in the number of people across the globe gaining access to the internet, Sheridan added, should ensure that the company continues to attract new subscribers, regardless of increased competition.
“Looking at the global opportunity among home broadband (~790m global broadband households (ex-China) in FY2023) and/or mobile device users (~2.9bn global smartphone users (ex-China) vs. NFLX estimated penetration of ~20% in FY2023), we see a long runway for NFLX subscriber growth that remains intact despite increased competition,” he said.
Sheridan upgraded Netflix to buy from neutral and raised his price target on the stock from $400 to $410, representing 26% upside from Thursday’s closing price of $324.66.
UBS isn’t the only investor to turn bullish on Netflix at the beginning of 2019. The shares have risen 21% so far this year, compared to the S&P 500's 2.4% gain, indicating that the stock is back in favor after a difficult end to 2018.