Deutsche Bank says it overestimated the impact of negative cash flow at the streaming giant.
Shares of Netflix surged more than 3%, as high as $317.80, Friday morning after Deutsche Bank reversed course on the stock, upgrading it to buy.
"We've liked the secular growth story for some time, but have always struggled with valuation given what we saw as much higher investment levels (relative to the market's expectations) required to grow the international business," analyst Bryan Kraft* said in a note to clients Friday.
"We had underestimated the market's willingness to underwrite several years of negative FCF to drive growth. We were wrong about that, but it's more or less irrelevant now."
Deutsche Bank has upped its price target for the stock to $350, roughly 10% above where shares were trading Friday morning.
It's a steep departure from other Wall Street analysts, who have a bearish average target of $297 for the stock as they worry about continuing cash burn. One of Netflix's biggest pessimists, Wedbush analyst Michael Pachter, told Business Insider earlier this week that Netflix investors were "oblivious" to the company's ballooning debt. He has a target price less than a third of Deutsche Bank's.
Instead of a burden, Deutsche Bank sees the $8 billion Netflix plans to spend on 700 original shows this year as a way to further set itself apart from competition like Hulu, HBO, Amazon, and others.
"Netflix has changed the economics of content production by leveraging a global DTC revenue base and, in doing so, has changed the strategic direction for the rest of the industry, pushing them to follow Netflix's lead, not knowing whether or not they'll succeed," Kraft writes.
"Netflix continues to capitalize on this lead by reinvesting in content, marketing, and the user experience; which is growing subscribers and making it more of a magnet for talent, further extending the company's lead."
Netflix has easily outpaced its big tech company peers in the so-called FAANG group in 2018 so far, rising 56%. The closest competitor, Amazon, is up just 22% in the same period.
The company is scheduled to report earnings results for the first quarter on Monday April 16 after markets close.
*an earlier version of this post misspelled Brian Kraft's last name.