Netflix Stock Predictions

The article was written on May 31 2015

Netflix, Inc. (NFLX) is trading at all time highs, as the stock price has increased over 82% so far this year alone.I Know First predicted has had a bullish outlook for Netflix over that same time period, first writing about the stock on January 9th.

With the stock price increasing so much in the past five months, it makes sense that some investors would look to sell the stock to cash in on their gains. This would be a mistake, though, as the stock price is only going to continue to climb. The company’s strategy of sacrificing profits to fund international expansion and original content is paying off, and will lead to continued massive growth throughout the rest of the decade.

International Subscriber Growth

Netflix plans to finish rolling out its streaming service internationally by the end of 2016, introducing the service into over 200 different markets. This has eaten into the company’s profits, but its stock price has still soared as more and more people sign up for the service. Indeed, subscriber growth seems to be the key measure that investors look for when evaluating the company.

Figure 1. Source: YCharts.com

This is a positive for the company’s stock price, as subscriber growth is only going to continue to grow. The international expansion has been successful so far, and it is rumored that the company will enter into Japan, Italy, Spain, and Portugal during the second half of the year.

During the most recent quarter, the company surpassed 60 million subscribers, but only 20.9 million of these are international. Netflix is currently only in 50 countries, and the company’s foothold in these countries should continue to grow as it expands into other markets. A report from Cowen analyst John Blackledge recently predicted that the amount of international subscribers could grow to 103.5 million by 2020, over five times the current amount.

This estimate does not even include the China market, where Netflix is working to find a solution to enter the market. To do so, the company will need to find a partner, as the country has strict market regulations, including the stipulation that only 30% of the content provided can be foreign. One partner that Netflix has been linked to is Wasu Media, an affiliate of Alibaba (BABA).

The Chinese market could be huge for Netflix, as the country has already been exposed to House of Cards, one of the company’s original shows. The show is extremely popular in the Chinese market, already the company exposure in the market. If the Chinese market were included in the forecast for international subscribers, another potential 27 million subscribers could be added to the estimates for 2020.

Figure 2. Source: Statista.com

Content Key For

Subscriber growth from international markets will be enormous in coming years, especially as international expansion winds down towards the end of 2016. But more people are also signing up for the service domestically. As I argued in an article on April 16th, the future model of television will evolve to where people are able to pick and choose what they want to pay for, instead of the current cable model where over 200 channels can be packaged together.

In the new model, providers will only stream the specific channels that customers want, making the cost of television lower as customers won’t have to pay for unwanted channels. This will make high-quality, original content extremely important, which has been Netflix’s biggest focus for years besides international expansion.

Shows like House of Cards, Daredevil, and Orange is the New Black have been critical hits and have plenty of fans. These are just a few of the several hours of original content that the streaming service provides, with the company set to release at least 48 originals during the current year. This includes its first original movie, the sequel to Crouching Tiger, Hidden Dragon in August.

This type of original content will be a differentiator for the company and make the service a necessity for television viewers. It is also why other streaming services, such as HBO Go, are not a competitor for Netflix but a complimentary service. As more people cut the chord and move toward a new television-viewing model in the future, the decision to buy Netflix will come down to whether its content is worth the subscription fee.

Netflix is very well set up in this regard for the future, and has recently changed its content model to be worldwide. The company used to have to buy content regionally, and did not have exclusive global rights to its content. For example, Netflix did not have the rights for House of Cards in Europe. This actually worked out, as it gave the company exposure in important markets like Germany and Spain.

Now, the company is only interested in content that it has global rights to, so that it will not have to renegotiate to enter the show into many different markets. Considering the company’s huge push into international markets over the next year and a half, this only makes sense. In all, the management team of Netflix continues to make good decisions to drive subscriber growth, which will only send the stock price higher over the next year.

Analyst Opinion

Analysts tend to agree with the bullish outlook for the company, as many have recently raised their price targets for the stock based off of larger than expected international expansion. The Cowen and Company report that I mentioned earlier included an increased target price alongside the forecast for international subscriber growth. The analyst firm raised its price target from $625.00 to $760.00.

Other firms that have increased their target price for Netflix in the last month include RBC Capital, Citigroup, Inc., Pivotal Research, and Topeka Capital Markets. The increased target price from these firms ranged from $700.00 to $850.00.

The increased price targets from analysts are truly impressive considering how much the stock price has already increased. The stock is currently trading at just above $624.00, but has risen rapidly since the beginning of the year. The fact that analysts believe the company’s stock price has more upside potential shows the importance of subscriber growth for Netflix’s stock price, which should continue to surpass expectations in the future.

Algorithmic Analysis

I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The algorithm has more data to forecast within the long term and, naturally, outputs a more accurate predication in that time frame. Having said that, intraday traders, along with short-term players, will also benefit by taking the algorithmic perspective into consideration.

The I Know First algorithm was able to correctly predict the behavior of Netflix’s stock around the time of the earnings report. Figure 3 is an I Know First algorithm prediction made on January 13th, 2015. The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

In this forecast, Netflix had a signal strength of 30.94 and a predictability indicator of 0.35 for the one-year time horizon. In accordance with the algorithm’s prediction, the stock price increase 70.54% over that time, during which the earnings report was released.

Figure 3. I Know First 1-Year Forecast From May 20th, 2014.

Having demonstrated how I Know First’s algorithm was able to correctly predict the movement of Netflix’s stock price earlier in the article, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. The current algorithmic analysis includes the three-month and one-year forecasts for Netflix from May 31st, 2015.

Figure 4. 1-Month and 1-Year I Know Forecast For Netflix.

The three-month and one-year forecasts for Netflix are both bullish, with the one-year forecast especially impressive. The bullish forecasts make sense, as the stock price has stagnated recently following the massive gains it has made since the beginning of the year. Continued subscriber growth will continue to push the stock price higher, but a stimulus such as the next earnings report or an announcement that the company has reached an agreement to enter the Chinese market to set the stock price off. Such an event is likely during the coming year, making Netflix a solid investment choice for aggressive investors.

