If Netflix does succeed in attracting added European-based subscribers, Liberty Global may see the benefit of increasing subscribers and higher-cost service bundles, according to Philippe Laffont of technology and media-focused hedge fund Coatue Management.
Laffont, in a presentation at the 19th Annual Sohn Investment Conference, highlighted Liberty Global as a stock that will benefit from growing broadband and wireless usage in Europe, and the savvy management of the company's capital. Laffont also noted that consolidation among cable and wireless providers in Europe could ultimately put the company in the hands of Vodafone (VOD), AT&T (T) or Comcast (CMCSA).
Currently, European markets are well behind the United States when it comes to streaming video usage. While Netflix shows such as House of Cards and Orange Is the New Black have created a sensation in the U.S., the same is not true in key European markets such as Britain. "That will change very quickly with Netflix," Laffont said of the Reed Hastings-run company's international expansion. Laffont added at the Sohn Investment Conference that he believes Liberty Global is best positioned to benefit.
Laffont also described Liberty Global as a cheap stock based on basic valuation methods. Currently, the company generates about $4.4 billion in un-levered free cash flow, which Laffont believes can grow at between mid-teen to mid-20% rates depending on Liberty Global's share repurchase activity.
With 5% revenue growth, Coatue forecasts the company's earnings before interest, taxes, depreciation and amortization (EBITDA) to grow 8% annually. That EBITDA growth, given Coatue's forecasts of capital expenditure, would yield 15% free cash flow growth, Laffont said. Finally, depending on Liberty Global's share repurchase activity, free cash flow per share growth could reach 25%, according to Laffont.
Consolidation on the Horizon?
Laffont also raised the prospect that Liberty Global could go from an active acquirer of cable and wireless assets in Europe to a target. Citing the prospective consolidation of Time Warner Cable (TWC), DirecTV (DTV) and T-Mobile (TMUS), Laffont predicted that a similar wave could hit Europe's shores. "We don't see why the story that is happening in the U.S. doesn't happen in Europe," he said, when speaking of cable and wireless consolidation.
Laffont cited Liberty Global as potentially an attractive asset for large European conglomerates or U.S.-based players looking to diversify from their home market. Laffont cited Vodafone, AT&T and Comcast as possible suitors for Liberty Global, while also noting that the company remains undervalued even if it is not up for sale.
The hedge fund manager said Liberty Global currently trades at about eleven times its free cash flow per share, and could more than double to $100 a share as European media markets catch up to the U.S.
Bottom Line: Netflix's stock will be volatile depending on how the company executes on its international expansion plans. Liberty Global could be a safer way to play Netflix's growth in Europe.
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-- Written by Antoine Gara in New York.