Netflix’s (NASDAQ:NFLX) stock dipped earlier in the week before recovering Thursday with the broader market rally. Over the last month it’s down over 45% indicating a huge loss in confidence in its growth and future. We believe that the market correction is overdone and highlight the positive steps the company has taken to improve its content offering, which will support growth. This view is shared by some sell side analysts as suggested by Piper Jaffray’s $300 and Bank of America Merill Lynch’s $224 price targets. We acknowledge that Q3 has not gone well, but we believe that it should be able to return to growth in Q4 of 2011 and regain some investor confidence in its growth prospects.
The company has been continuously improving its content and has signed deals recently with Dreamworks Animation and a deal to acquire exclusive rights to Lilyhammer. We also believe that Netflix will continue to benefit because of its significant lead in terms of content offering and reach and because its competitors like Dish Network’s (NASDAQ:DISH) Blockbuster and Amazon (NASDAQ:AMZN) are not really viable alternatives for subscribers yet.
Nevertheless risk exists from slowing expected expansion in Latin America and the possibility that competitors increase their streaming content much more quickly than we expect.
Our price estimate for Netflix stands at $195, implying a premium of roughly 70% to the market price.
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