Netflix Jumps on Love From Goldman Sachs (Update 1)

Updated from 9:35 a.m. EST to provide executive comments regarding hours watched in the tenth paragraph.

NEW YORK ( TheStreet) -- Netflix ( NFLX) is getting some love this morning from Goldman Sachs as the investment bank raised its earnings estimates and price target on the movie provider citing improved subscriber growth and margin expansion.

Shares of the Los Gatos, Calif. movie provider finished up 4.18% to $173.01 to extend its gain this year to 86.7% compared to 11% for the Nasdaq.

Analyst Heath Terry raised his price target to $184 from $125 but kept his "neutral" rating explaining that Netflix may benefit from increased distribution, an enhanced content library and larger international presence.

"As the ecosystem grows and Netflix's model evolves, we believe the addressable market of subscribers is better defined by the number of "connected consumers" than households," Terry wrote in his note. The Goldman Sachs analyst lowered his earnings estimate for the year ending 2013, moving to $1.12 per share from $1.41, but 2014 and 2015 estimates were raised significantly, moving to $3.72 and $6.07 per share, up from $2.62 and $3.81 per share, respectively.

Netflix is expanding the number of devices where its services are carried, ranging from Apple ( AAPL) iPhones, iPads to Microsoft's ( MSFT) Xbox, as well as smart TVs.

Terry notes that the movie provider could see even further penetration as the number of devices increases. He says there are 132 million potential domestic customers, and sees that growing to 206 million potential customers in the next five years. Currently, Netflix is estimated to have 22.8 million domestic streaming subscribers, and Terry believes that could grow 165 basis points for the next five years to 53 million users.

Importantly, Netflix's streaming service is the real driver of growth. As more smart TVs come to market and consumers take advantage of their Internet connectivity, streaming has the potential to drive future sales and profits.

"We believe those with Smart TVs actually connected to the Internet (around 50% of total installed Smart TVs) are the most likely to sign up for a service like Netflix, as TV/Video consumption is the key use case for the device and the Internet connection indicates a real intent to consume online video content," Terry penned in his note.

Netflix's next big driver of growth is game consoles, which Terry believes Netflix could have additional upside from, though the primary use is still playing games. Tablets and smartphones, though they drive usage for Netflix, are not the primary reason customers sign up for Netflix.

NFLX Chart NFLX data by YCharts

Update: CEO Reed Hastings said on his Facebook page that consumers watched more than 4 billion of hours of video on Netflix over the past three months.

Shares are moving higher in after-hours on the news, gaining 2.6% to $177.11 according to

-- Written by Chris Ciaccia in New York

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