RBC Capital Markets analysts have been bullish on Netflix (NASDAQ:NFLX) for the last 10 years. They’ve been right to be. The stock of the media streamer has surged by nearly 2,300 per cent over that time.
Surely Netflix can’t keep up that pace over the next 10 years. Probably not. But RBC thinks the company can still grow its earnings per share an average of 30 per cent annually the next decade with the stock achieving annual mid-teens growth.
RBC also believes Netflix can grow its subscriber base by 2030 from the current 193 million to as many as 525 million.
In a new report, RBC continues to rate Netflix an “outperform” with a 12-month price target of US$610, implying about a 32% gain from the current price.
Here are seven reasons why RBC believes Netflix can thrive the next 10 years:
1. A Very Large Secular Growth Opportunity: There are approximately 800 million broadband households worldwide (ex-China) and over two billion smart phones globally (ex-China).
We believe all of these constitute potential subscriptions to video streaming. (And who knows?…maybe one day global media companies will be allowed to compete in China…)
Given streaming’s superior value proposition to consumers – almost any content on almost any device at any time at a reasonable price — we believe streaming video has years of premium growth ahead of it.
2. Netflix Is The Leading Global Streaming Player: In a business where scale matters: With ~193 million paid subscribers (subs), Netflix has perhaps more than 3x as many subs as its closest global competitor.
And whoever has the most subs generates the most revenue which enables more content purchasing which begets more subs which generates more revenue.
3. Netflix Has Proven Profitability In the U.S. Market: And is proving it in international markets: Over the last 5 years, its U.S. streaming contribution profit margins have more than doubled from less than 15% in 2012 to 36% in 2019 (under new accounting), with material leverage in both streaming costs and in marketing expenses.
Meanwhile, Netflix’s international contribution profit reached $1.6 billion in ’19. This is a contrarian view, but we believe international could actually be as or more profitable than the U.S., because those markets are generally less competitive and local production costs can be dramatically lower.
4. Netflix Has Proven Its Global Appeal: It appears to have achieved 10% household broadband penetration in almost every international market it has launched, from South America to the Nordics to Western Europe and to Canada.
Further, our extensive survey work has consistently shown higher satisfaction scores among Netflix customers in International markets (UK, France, Germany, Brazil, Japan, Mexico, India) than in the U.S., suggesting that NFLX’s international position may actually be stronger than its U.S. position given weaker all-in entertainment options in most markets.
(From RBC’s annual UK survey)
5. Netflix Has Pricing Power: Based on our consistent survey work and based on its historical sub addition trends. If it executes well on its current price actions, this power could translate into sustained revenue growth rates.
Note that NFLX has averaged 35%+ global streaming revenue growth for seven straight years.
6. By 2030, We estimate that NFLX could generate $75 in earnings per share (EPS): implying a 30% 10-year EPS compound annual growth rate and nine-year mid-teens share price appreciation.
(EV = enterprise value. EBITDA = earnings before interest, taxes, depreciation and amortization.)
7. NFLX May Face The Least Regulatory Risk Of The FANGs : a) Since it’s not an ad-supported business, Netflix may have much less reliance on personally identifiable information (i.e. gathering user information and selling it to advertisers), a hot political issue these days.
b) Netflix is arguably more media-than tech-platform, and thus might avoid the current scrutiny that the latter are facing.