Netflix's Subscriber Growth Momentum Trumps Cash Burn (for Now)

(Bloomberg) -- Volatility in equity markets over the past few weeks hasn't stopped Netflix Inc. from reaching new all-time highs as analysts battle it out to have the most bullish view.

The shares powered through $300 Friday and are up more than 40 percent since the streaming company reported better than expected fourth-quarter subscriber growth and essentially in-line earnings and revenue on Jan. 22. It's the top-performing stock in the S&P 500 this year.

Jeffrey Wlodarczak at Pivotal Research Group raised his price target to a Street-high $400 on Tuesday, arguing that as long as Netflix continues to beat estimates and issue bullish subscriber forecasts, the stock will continue to advance. Wlodarczak said Netflix's higher-than-expected 2018 marketing-expense forecast didn't faze investors, writing in a note that “the market appeared to effectively give NFLX management carte blanche to spend aggressively to drive healthy subscriber growth.”

The company's aggressive spending on original content and marketing means it probably won't generate free cash flow for the next few years, with analysts on average predicting outflows of $2.85 billion this year, $1.92 billion in 2019 and $1.16 billion 2020, according to data compiled by Bloomberg. So for now at least, if the recent strength in the stock is indication, investors don't really care.

Macquarie analyst Tim Nollen raised his price target to $330 from $275 Monday, saying the negative cashflow is a concern, but is directly related to original program spending and that Netflix can stem the cash burn by pulling back on licensed content. UBS also hiked its price target yesterday to $345 from $290, with analyst Eric Sheridan arguing the pace of content spending will widen Netflix's lead.

Not all analysts give Netflix a free pass when it comes to its cash burn. Wedbush's Michael Pachter, who is one of the three analysts who rate the stock the equivalent of sell, has said in the past the negative cash flow will eventually cause a pullback in the stock. In January, he wrote that Netflix will burn cash to fund content acquisition “for many years” even though it has increased price of the service three times.

--With assistance from Janet Freund and Joshua Fineman

To contact the reporter on this story: Stephen Sweeney in New York at ssweeney39@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Rob Golum, Mark Schoifet

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