The past few days have seen some extraordinary valuations put on Netflix by Wall Street investors and their advisers following on from a surprisingly good set of results from the streaming company on July 17th. Morgan Stanley, for example, is happy to place a target price of $210 per share, while other investment banks talk about $175 (SunTrust), $199 (Bank of America) and all the while when Netflix had investors in rapture over its $188-$191 actual share price last week.
However, there is a degree of caution in the air given that some senior staffers are cashing in share options. For example, CEO Reed Hastings sold 115,577 shares, at an average price of $152 for a total return of $17.6 million. General Counsel David Hyman cashed in $2.1 million-worth. In the past 90 days staff at Netflix have sold – quite properly – 343,728 shares worth in total $53.8 million.
Analysts at MoffettNathanson Securities (MNS) in a recent note to investors stated bluntly that Netflix’s intentions couldn’t be any clearer. “The company will continue to borrow money to fund original content investment to drive subscriber growth. Given the acceleration in international subs and the record number of Emmy nominations, Netflix’s operating momentum is on full display for all to see.”
Senior analyst Michael Nathanson says: “We’ve watched this stock levitate like AOL (circa 1996 to 2000) and have stayed on the sidelines as we’ve struggled with valuing a company that willingly generates no free cash flow and now sits on close to $20 billion of programming obligations. In fact, in the most recent quarter, as revenues have grown by +$680 million, cash flow has actually fallen by over -$350 million. With the market’s sole focus on subscriber growth, Netflix is clearly over-delivering on consumer expectations and driving higher satisfaction.”
Nathanson gives as an example a high-quality restaurant that charges just $10 for the best steak dinner in town, and fills ever seat! “At some point the restaurant’s owners will start asking about a path to generating cashflow on their investment,” he adds.
While this uncertainty remains in place MNS stays cautious, reiterating its “Neutral” rating on Netflix although it does raise its target price by a modest $9 to a conservative $136 per share.