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Analysts raise Netflix targets but ask if shares now too high

Netflix DVDs return mailers are shown in a mail box in Encinitas, California October 21, 2013. REUTERS/Mike Blake
Netflix DVDs return mailers are shown in a mail box in Encinitas, California October 21, 2013. REUTERS/Mike Blake

(Reuters) - Strong subscriber gains by Netflix Inc prompted analysts to sharply raise price targets on the stock, even as some worried that the shares are getting expensive as the online online video company faces bigger bills for original programs.

Netflix shares were set to open 9 percent higher at around $387, having more than doubled in value in the last six months. It is the biggest gainer in the S&P 500 index this year.

At least 12 brokerages raised their price targets on Netflix's shares by as much as $200, yet most of the price targets are still below the current share price.

Netflix added 1.3 million customers to its U.S. streaming business during the September quarter and said on Monday it expects to end the year with between 32.7 million and 33.5 million users.

"We recognize how difficult it is for a company to continue growing at that rate, but we do not see any evidence that the rate will slow down in the near-term," Evercore analyst Alan Gould wrote in a note to clients.

He raised his price target to $350 from $150 and upgraded the stock to "equal weight" from "underweight."

Original content is helping Netflix differentiate from other online video services and will have a significant positive impact as they accumulate audiences, JP Morgan analyst Doug Anmuth said.

Netflix has invested heavily in original series such as political satire "House of Cards" and critically acclaimed prison drama "Orange is the New Black".

Anmuth added that a Netflix deal with Dreamworks Animation to launch its first animated original series, "Turbo: F.A.S.T.," in December and its decision to reinvest earnings upside in new international markets will drive up viewership.

However, some analysts remained skeptical of the company's sky-rocketing stock, which is trading at 113 times earnings, according to Starmine.

"We find it difficult to justify this valuation given the risks of rising content costs, heavy competition, and the likelihood NFLX may need to raise additional capital to fund operations," Jefferies & Co analysts wrote in a note.

Jefferies raised its price target by $55 to $215 -- just over half the current share price -- but maintained its "underperform" rating.

It said Netflix's operating model will come under pressure from its content liabilities of about $5.4 billion, long-term debt of $500 million, free cash flow of $7 million and need to raise additional capital.

"Netflix cannot maintain high growth and high profits at the same time," said Wedbush analyst Michael Pachter, as the company faces "ever increasing content costs while satisfying customer demands for ever increasing content quantity and quality."

Pachter said Netflix's content strategy will lead to low profitability, limiting the company's value to well below its current price.

(Reporting by Sruthi Ramakrishnan and Rachel Chitra in Bangalore; Editing by Rodney Joyce)

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