Hot Stocks 2014: Investors took a cue from a bullish upgrade Tuesday and piled into Netflix Inc. (Nasdaq: NFLX) stock.
Netflix shares surged $32.50, or 7.38%, to a fresh 52-week high of $473.68. Volume was brisk. With two hours left in the session, 3.72 million shares had already changed hands, compared to the stock's average daily volume of 2.86 million shares. By the close, volume was a hefty 5.22 million shares.
Also rising was NFLX option activity. Put-and-call trading spiked to three times its typical daily clip, with the greatest amount of activity seen in bullish short-term contracts.
Fueling the gains and volume spike for the on-demand Internet streaming media company was a ratings upgrade and price target boost from influential Goldman Sachs. The investment bank boosted its rating on NFLX to "Buy" from "Neutral," and hiked its price target to $590 from $380.
The firm raised its estimates for 2014 to $5.53 billion in revenue with adjusted non-GAAP profit of $5.89 per share. That's up from a prior forecast of $5.43 billion and $5.63 per share. For 2015, Goldman is even more upbeat. It sees earnings per share at $9.64 on revenue of $7.17 billion, from an earlier projection of $8.80 EPS on revenue of $6.79 billion.
While you can't always believe a Goldman rating - see "The Dirty Secret Behind Goldman Sachs' Conviction Buy List" - Netflix stock is indeed looking strong right now...
Hot Stocks 2014: Why NFLX Was Upgraded
Goldman wrote that NFLX will "drive sustained outperformance" as "subscriber growth will continue to exceed expectations." Netflix's addressable audience of subscribers will more than double over the next three years as the company adds new markets, the firms' analysts noted.
The firm also views the market for children-friendly content as a likely area of growth for the company.
"Following the loss of Nickelodeon content in 2013, Netflix has made significant investments in kids' content through deals with Disney (NYSE: DIS), DreamWorks (Nasdaq: DWA), and Mattel (NYSE: MAT) most recently, which could create a powerful niche for Netflix to compete and create original content," Goldman wrote.
The increasing use of mobile devices among today's youth also bodes well for Netflix.
From Goldman: "Kids are spending 3X more time each day on mobile devices, compared with two years ago, and kids' cable networks are reaching almost 3X the number of households as Netflix. Further, demographics data show that only 3% of Netflix's current users are kids, which leads us to believe that (1) the kids opportunity is large, and (2) Netflix is underpenetrated..."
Another driver for Netflix is the popularity of its exclusive, critically acclaimed and award-winning adult shows like "Orange Is the New Black," "House of Cards," and "Arrested Development."
But, as we pointed out earlier this year, it's much more than programming that will continue to boost NFLX...
NFLX Stock: Firing on All Cylinders
One big reason to bet on Netflix's potential is its continued subscriber growth.
In Q1 2014, Netflix revealed it has 48.35 million subscribers across the globe - an addition of almost 4 million members during the quarter.
Netflix remains the top online video streaming company, despite increased competition from YouTube, Hulu, Yahoo!, and Amazon.com.
A second reason Netflix looks good right now: It has shown strong international growth.
In May, NFLX announced plans to debut its services in a number of European markets including France and Germany. The two are among the world's biggest broadband markets.
The European expansion comes on the heels of Netflix's launch last year in the Netherlands, and its 2012's rollout in the U.K., Ireland, Denmark, Finland, Norway, and Sweden. Netflix also commands a sizable audience in Australia and New Zealand.
In an appearance on Fox Business' "Varney & Co." in April, when NFLX shares slumped to $367, Money Morning Chief Investment Strategist Keith Fitz-Gerald said he loved that Netflix's international revenue now accounts for 25% of NFLX's revenue base.
"It's new revenue and new fee model is going to give them the ability to support great content," said Fitz-Gerald. "I think it's a 'go-for-it!'."
Finally, one of the biggest reasons to bet on NFLX is its "game-changer" status when it comes to technology.
Money Morning Defense & Tech Specialist Michael Robinson says NFLX will remain a major player thanks to 4K ultra-high-definition television.
Robinson explained on FOX Business early this year that while the 4K technology is already here, content is lacking. That's where Netflix comes in and dominates.
"We've got the technology, but no one is broadcasting in it," said Robinson. "Netflix wants to own the home market."
Even before Goldman's upgrade Tuesday, NFLX stock had staged a recent and considerable bounce. With Tuesday's gains, shares are up some 50% since late April. The rebound followed a more than 30% drop from early March through April amid a significant rotation out of and sell-off in momentum (Internet, social media, and biotech) stocks.
More from Michael A. Robinson on the Best Investments of 2014: Too many people view taxi service as nothing more than a pedestrian, every day type of business. Those people would be very wrong. It's actually a complicated, multi-billion dollar sector that right now is going through perhaps the most profound changes of any business model in the United States - and you can cash in on this taxi service company now, before its IPO, to reap maximum profits...
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- Schaeffer's Option Center: Daily Option Blog
- MarketWatch: Netflix Drives "Sustained outperformance": Goldman