Netflix shares soar 7% as Goldman adds stock to its Conviction List
Netflix Inc. shares soared more than 7% Friday, after Goldman Sachs added the stock to its Conviction List and said a pullback from record set last July presents an attractive buying opportunity. "We continue to believe Netflix's investment in content, technology and distribution will continue to drive subscriber growth well above consensus expectations both in the U.S. and internationally," Goldman analysts wrote in a note. "While we also believe that these investments and the associated cash burn (roughly $3bn in 2019E) will require it to return to the HY debt market over the next 3 years, we see a path for Netflix to both double its annual content investment and generate positive cash returns by 2022 while improving leverage and interest coverage ratios vs. 2018, as the company begins to fully amortize owned Originals." Separately, Imperial Capital reiterated its outperform rating on the stock, the equivalent of buy, and said it is still comfortable with estimates heading into the first-quarter earnings season. Analyst David Miller is sticking with his $459 stock price target, which is about 58% above Friday's trading level. Miller said the appointment of Spencer Neumann as CFO is positive, given his private equity background, having worked at Providence Equity Partners and Summit Partners from 2005 to 2012. Neumann was hired away from Activision Blizzard , where he was also CFO. "This could prove advantageous, in our view, as Netflix, through its most recent $2.0 billion bond issuance on October 22, has become much more leveraged versus this time last year, and financial executives with private equity backgrounds tend to be, more often than not, ROIC (return on invested capital) focused, with debt, rather than equity as the core engine of growth," Miller wrote in a note. With long-term debt now standing at $8.33 billion, that's what Netflix needs, as free cash flow is still negative and the stock is still reflecting the sum of all free cash flows discounted into the future. Imperial is hoping that Netflix can decouple from "FAANG," the acronym that groups it with Facebook Inc. , Amazon.com Inc. , Apple Inc. and Google parent Alphabet Inc. . The stock's 40% gain in 2018 could have been bigger, were it not for the market psychology surrounding the other FAANG stocks, he wrote. The S&P 500 fell about 7% in 2018. Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news.