Wall Street gushes over Netflix, says it has reached ‘escape velocity’

Reed Hastings, chief executive officer of Netflix Inc., right, applauses during a news conference in Tokyo, Japan.

Akio Kon | Bloomberg | Getty Images
Reed Hastings, chief executive officer of Netflix Inc., right, applauses during a news conference in Tokyo, Japan.

Netflix crushed Wall Street forecasts again, adding 5.3 million subscribers in the third quarter compared with expectations for 4.5 million, and the gains were driven by international subscriber growth.

Analysts said shares of the video streaming giant should continue to advance even as Netflix raises prices and spends money for original movies and series.

“Netflix is the leader in a category that contains massive multi-year growth potential,” Piper Jaffray’s Michael Olson wrote in a note to clients Tuesday. “There will be increasing competition and unforeseen hurdles along the way, but we think Netflix has reached ‘escape velocity.'”

The company’s shares have rallied 64 percent this year through Monday versus the S&P 500’s 14 percent return. But they were down 0.4 percent in premarket trading on Tuesday morning. Analysts from Piper Jaffray and Goldman Sachs raised their price targets.

Netflix announced on Oct. 5 it is raising prices for some of its subscription plans. The company’s $10 per month high-definition plan now costs $11 per month. Its 4K streaming plan, which enables higher resolution video streaming, will cost $14 per month, up from $12 per month.

Wall Street is optimistic the recent pricing changes will drive Netflix’s earnings higher.

“Netflix is accelerating away from competitors and building pricing power while driving better-than-expected subscriber growth,” KeyBanc Capital’s Andy Hargreaves wrote in a note to clients Monday. “This combination suggests greater near-term earnings potential and the likelihood for a longer period of above average growth than we previously expected.”

One top analyst also downplayed some investors concerns over Netflix increasing its spending for original content. The company’s hits include “Stranger Things,” “Orange is the New Black,” “13 Reasons Why” and “House of Cards.”

Netflix revealed on Monday it will spend $7 billion to $8 billion next year for content versus the previous guidance of $7 billion.

“While the projection for ‘many years’ of continued cash burn and a premium valuation raises the risk profile, with a widening content moat, a growing distribution ecosystem and expanding addressable base, we believe that Netflix is building an unmatchable global entertainment platform,” Goldman’s Heath Terry wrote in a note to clients Tuesday.

In similar fashion, one analyst believes the increased spending for content will eventually lead to rising profitability.

“Proven success in the US and initial int’l markets provides a roadmap to success in new markets, and scale should allow NFLX to leverage content investments and drive margins,” Morgan Stanley’s Benjamin Swinburne wrote in a note to clients Tuesday.

Piper Jaffray reiterated its overweight rating for Netflix and raised its price target on the shares to $240 from $215. Goldman Sachs also reaffirmed its buy rating and increased its price forecast to $250 from $235. Netflix shares closed at $202.68 on Monday.

— CNBC’s Michael Bloom contributed to this story.

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