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Weekly Wrap: Netflix Looks Pricey, Citi a Bargain

The streaming video firm ended 2016 with strong results, but shares are looking expensive. Plus, Citigroup is still our top banking idea, and holidays were hard for Target.

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Jeremy Glaser: Netflix looks pricey; Citi is undervalued; and Target has a tough holiday season. This time on the Morningstar Weekly Wrap.

Shares of Netflix jumped after the firm reported a strong end to 2016. But Morningstar's Neil Macker sees shares as significantly overvalued.

Neil Macker: Netflix ended 2016 on a high note with stronger international subscriber growth with 5.1 million net adds and improved U.S. growth with 1.9 million net adds. Netflix continues to expand its streaming base, ending the quarter with 89.1 million global paid subscribers, up from 70.8 million a year ago.

Revenue and total segment contribution came in above our expectations as the U.S. segment continues to benefit from the firm's recent price increases. Average revenue per user in the U.S. improved by 15% year over year to $9.91 per month. 

Management continued to emphasize its investment in proprietary content. The company expects to create 1,000 hours of original content globally in 2017, up from over 600 last year. Netflix projects to spend $6 billion in total content spend versus $5 billion last year.

We retain our narrow moat rating for Netflix and are modestly increasing our fair value estimate to $73 from $69 to account for the time value of money from rolling our model forward and an additional year of margin expansion for the international segment. 

Glaser: On the other hand, Jim Sinegal sees Citigtoup as attractively priced today.

Jim Sinegal: Citigroup remains our top idea in the banking sector following fourth-quarter earnings. What we like about Citigroup is first of all the valuation. It's trading at a significant discount to its tangible book value. While peers like Bank of America are trading at a significant premium. Second, we think Citigroup has a clear path to higher earnings and higher returns on capital. They returned $11 billion to shareholders just this year, that's three fourths of their net income, they have $14 billion supporting legacy assets that they'll be able to return in future years, and we think expenses will continue to come down. Legal and restructuring costs still account for almost a billion dollars of total expenses. We think looking out two or three years, Citigroup will be much more profitable and its valuation at the moment is not reflecting that.

Glaser: In more confirmation that it was a tough holiday season for brick-and-mortar retailers, Target said this week that it had a 1.3% decline in same-store sales in November and December. Add in the promotions the firm had to run to even achieve those results, and management was forced to bring down its earnings guidance for the year. Despite the slide in the stock price, analyst Erin Lash thinks investors are better off waiting on the sidelines of the no-moat retailer.

And in case you missed it, on Morningstar.com this week Karen Wallace shared some tips for getting started with a 529 college-savings plan.

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.