Netflix is spending a multibillion-dollar bushel on content, funded in part through a growing debt load. And Wall Street analysts say the company has a big runway in front of it to get a bigger return on that investment.
The net value of content currently on Netflix’s service was a whopping $11 billion as of March 2017, according to a study by Morgan Stanley analysts led by Ben Swinburne. That’s more than Time Warner ($10 billion), and is larger than the combined content assets of Viacom ($4.9 billion), Discovery Communications ($2.4 billion), AMC Networks ($1.5 billion) and Scripps Networks Interactive ($1.1 billion), the analysts estimated.
At the same time, however, the revenue Netflix generates on that base of content trails traditional TV and film conglomerates. Netflix pulls in about $1 of revenue per dollar of net content value, versus $2-$4 among old-school entertainment companies. That differential — along with the expectation Netflix will continue to ramp up international subscribers — led the Morgan Stanley analysts to raise their price target on the stock from $175 to $185 per share, while maintaining their “overweight” rating.
In short, “Netflix is building a much larger profit pool than the market understands,” the analysts wrote in a research note to clients Thursday.
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Netflix, it’s worth noting, just snagged 91 nominations in the 2017 Emmy Awards — a record for the company, and second only to HBO.
There’s no guarantee Netflix can ever monetize its content with as high a rate of return as traditional TV networks have historically, the Morgan Stanley crew conceded, noting that Netflix does not sell advertising. “Nevertheless, the implications would suggest a dramatic opportunity to drive earnings,” the analysts wrote.
Similarly, an analysis last fall by RBC Capital Markets found that Netflix in 2015 generated less than half the profit per hour viewed of many TV networks. Again, that implies significant potential for the company to boost earnings.
Programming that Netflix owns full global rights to — like “Stranger Things” — represents about 15% of the total content asset value, or $1.7 billion, Morgan Stanley estimated. And, notwithstanding Netflix’s recent high-profile cancellations, the company is expected to keep pumping money into originals with those becoming a bigger portion of total content spending.
“As Netflix owns more of its content outright, the longer average life and increasingly global nature of its assets could drive increased content efficiencies and higher margins over time,” the Morgan Stanley analysts wrote.
Not every Wall Street analyst is bullish on Netflix’s prospects. “As competition drives the cost of content inevitably higher, we expect Netflix cash burn to continue, and management acknowledged that this will persist for ‘many years,'” Wedbush Securities analyst Michael Pachter wrote in a note this week. “International profits may remain elusive due to competition for content and subs, while domestic growth inevitably decelerates.”
Pachter admitted that “we have been consistently wrong about this stock” but maintained his “underperform” rating on Netflix, with a 12-month price target of $73 per share. The analyst continues to insist that Netflix is overvalued: It is “destined to be a cash-burning, high-growth company until it changes its strategy and accepts its fate as a highly profitable, slow-growth company,” he opined.
Netflix is scheduled to report second-quarter 2017 earnings on Monday, July 17, after the market closes. Analysts expect Netflix to add 600,000 U.S. streaming subs and 2.6 million internationally (in line with the company’s guidance issued in April).