Netflix rockets higher, analyst revises stock forecast up

Streaming service’s content spending plan fuels optimism

Netflix might cost you $10.99 a month to subscribe to its streaming TV service. And if you want to buy a share of Netflix stock, that will set you back about $380 today.

But, that lofty price tag might actually be a bargain, if the expectations of Goldman Sachs analyst Heath Terry come to pass.

On Wednesday, Terry lifted his price target on Los Gatos-based Netflix’s stock to $490 a share from his previous forecast of $390. Terry’s new target for Netflix also represents an almost 35 percent increase from where the company’s shares closed on Tuesday. And if you bought Netflix at the end of 2017, well, good on you. Because Netflix’s shares have almost doubled in value since finishing last year at $191.96.

But the South Bay company’s ride into the stratosphere has come as some Bay Area video

stores wither away.

So, why does Terry think Netflix can climb to almost $500 a share after the stock has already torn up Wall Street over the past six months?

Part of Terry’s opinion is based on Netflix’s big content-spending plans. Netflix has said it will spend $8 billion to produce, acquire or license content this year, and Terry believes such spending levels “will allow the company to drive additional subscriber growth, particularly

in markets where the company’s brand presence isn’t as strong as it is in the U.S.”

When Netflix reported its firstquarter results in April, the company said it had 56.7 million subscribers in the U.S. and 68.3 million subscribers in all of its international markets.

Terry also said that the matter of negative free cash flow — a situation where a company has more cash going out the door as opposed to coming in during a specific business period — is likely to become less of an issue for Netflix. With Wall Street analysts estimating Netflix’s negative free cash flow to reach almost $3.1 billion

in 2018, Terry expects 2018 to be the peak year for Netflix’s negative free cash flow, and that amount should be getting smaller as Netflix’s revenue growth begins to exceed its growth in content spending next year.

As Netflix continues to expand its original content efforts — Chief Content Officer Ted Sarandos recently said Netflix will have 1,000 original programs and movies on its service by the end of this year — the growth of its streaming empire, and of others, continues to upend what remains of the oldschool movie-rental industry.

Just this week, KQED reported that Five Star Video, the last videorental store in Berkeley, will shutter its doors on June 17 before having a final liquidation sale in July. The store offers 18,000 titles for rent, but owner Andy Katz said that with his lease expiring, it’s time to call it a day after 38 years in business.

“There’s a tactile side of shopping, and that’s gone with Netflix,” Katz told KQED, adding that the Netflix algorithms that suggest content based on a person’s videostreaming habits “takes away your curiosity for new things. It’s the further commoditization of art.”