The Future of Netflix Isn't House of Cards, It's Shows for Kids

Photograph Courtesy Netflix; Illustration by 731

As anyone with a young child knows, a storybook or cartoon is the ultimate in “long-tail” media consumption: The 53rd rereading or re-watching is cherished just as much as the first time. And that’s good news for Netflix, according to a new report from Goldman Sachs.

The streaming-video giant has invested heavily in content for children at a time when kids are spending more time on mobile devices. Right now, only 3 percent of Netflix viewers are children, Goldman analyst Heath Terry wrote, “which leads us to believe that (1) the kids opportunity is large, and (2) Netflix is under-penetrated.” He upgraded the stock to buy on Monday.

Another positive: Kids have no tolerance for scheduled TV, believing this should be an on-demand world, all the time—Goldman knows kids are like that—and Netflix follows no rigid programing schedule.

Perhaps the biggest boon for Netflix is the growing ranks of toddlers and children with access to tablets and smartphones. As the Goldman team notes:

“Kids aged 0-8 in the U.S. are increasingly gaining access to mobile devices, as 75 percent of kids now have access … compared to 52 percent just two years ago, according to Common Sense Media. Interestingly, 7 percent of kids already have their own tablets, and to put this into perspective, only 8 percent of adults had their own tablets just two years ago.”

Moreover, Goldman writes, mobile is the only viewing platform that is gaining daily usage time among children. And multiple streams for homes with more than one child further opens the revenue gates at Netflix, which announced a modest price increase in April for new subscribers.

The Goldman analysts don’t see children as the only catalyst for Netflix’s profit growth. The streaming service is expanding internationally into six more European nations this year, with two to four additional ones expected in 2015. The company’s potential international market stands at more than 200 million viewers. Applying a market penetration rate of one-third—based on HBO’s experience in amassing 104 million subscribers abroad—Goldman estimates that Netflix could have more than 62 million international subscribers by 2017, compared to just 13 million now. “At $8.99, Netflix could increasingly come to be viewed as a high value add-on to a wireless data plan for any number of devices,” the Goldman analysts wrote.

Goldman thinks Netflix shares have a 34 percent return potential, with a target price of 590. Netflix shares rose 6 percent in morning trading, to 467, bolstering their 27 percent advance so far this year.

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