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Netflix was the talk of Wall Street again on Friday, as several analysts raised their stock price targets after dissecting the streaming giant’s better-than-expected addition of 7.66 million subscribers in the fourth quarter, early momentum of its advertising-supported subscription tier, plans for a broader password-sharing crackdown and Reed Hastings’ decision to drop his co-CEO title to focus on the role of executive chairman. Amid renewed bullishness, Netflix’s stock was up 6.8 percent in early Friday trading, at $337.16.
The streaming giant, which ended 2022 with 230.75 million global subscribers, had after Thursday’s market close called 2022 “a tough year, with a bumpy start but a brighter finish,” adding: “We believe we have a clear path to reaccelerate our revenue growth, continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering.” Many on Wall Street also see upside for the company’s shares after a sharp drop in 2022, arguing that the streamer is getting its groove back in terms of finding hit content, such as Addams Family spinoff Wednesday, and in terms of overall performance.
Bank of America’s Jessica Reif Ehrlich, who moderated the streaming giant’s earnings call Jan. 19, has a “buy” rating on Netflix with a price target raised from $370 to $410. In the bullish note, Reif Ehrlich wrote, “we believe password sharing along with the continued rollout of its AVOD service will drive an acceleration in growth throughout ‘23 in revs/subs and beyond. In particular, we are bullish on the long-term potential of advertising, which management stated could eventually reach 10 percent of total revenues.”
Guggenheim analyst Michael Morris, who has a “buy” rating on Netflix, boosted his stock price target by $305 to $375 in a report titled “Show Us the Money! Member Trends, Cash Flow Outlook Delight Investors.”
“Early ad-supported tier adoption bolstered member trend strength, but was not the sole driver, with password sharing initiatives to roll out broadly in late first quarter fueling sequential revenue acceleration,” Morris noted. “Netflix indicated that ad-supported unit economics were in line [with] or better than [the] ad-free plan.” And he emphasized that management noted limited switching from other tiers so far. The financial impact of the ad tier will be limited until mid-year, with “contributions to expand over time,” Morris concluded.
Evercore ISI analyst Mark Mahaney, in a report titled “Make It a Netflix Year,” also boosted his stock price target by $60 to $400 and reiterated his “outperform” rating.
He noted that his stock upgrade in mid-September had come “on the belief that Netflix’s ad-supported offering and password-sharing initiatives constituted major growth curve initiatives (GCI) — catalysts that could drive a material reacceleration in revenue and earnings per share growth.” While fourth-quarter results “provided only modest evidence of this,” the export predicted that “the best is [yet to] come. But fourth-quarter earnings per share results did provide evidence that Netflix’s core business has shook off its COVID comparisons and price increase backlash.”
As key drivers of the positive subscriber growth surprise, Mahaney highlighted “a robust content slate (Wednesday, Glass Onion, etc …), a return to more normal churn levels post the early ’22 price increase and, plausibly, the beginning of a solid contribution from password-sharing management in Latin America and the rollout of Basic With Ads.” And he emphasized: “What is so bullish about Netflix here is that the revenue and profit growth impact of these last two factors is just beginning to roll through Netflix fundamentals and should drive revenue growth acceleration and margin expansion throughout ’23.”
Summarizing management comments that the recently launched cheaper ad tier is incremental on both subscribers and average revenue per user (ARPU), Mahaney wrote, “we see the potential for a global weighted average of $9-plus of ad revenue per Basic With Ads sub, which could make Basic With Ads strongly ARPU-accretive.”
The Evercore ISI analyst’s bullish conclusion: “Netflix isn’t going into these GCI catalysts from a position of dramatic weakness, which is what the market had feared. The market appeared to have forgotten that Netflix is still the global streaming leader in terms of revenue, subs, viewing hours, content, profits etc.”
Meanwhile, Pivotal Research Group analyst Jeffrey Wlodarczak stuck to his “buy” rating on Netflix shares, but raised his price target from $375 to $400, driven by increased subscriber and free cash flow forecasts. “Netflix reported an unquestionably solid fourth-quarter result/’23 guidance,” he wrote. “Netflix represents a frankly unique tech growth story and remains well-positioned to generate solid subscriber and revenue/free cash flow growth, even given the reasonably high chance of a global recessionary environment, via their better monetization of the approximate 100 million-plus households that currently utilize Netflix outside of the paying household via password sharing.”
Cowen’s John Blackledge hiked his stock price target, too, from $405 to $440, while keeping his “outperform” rating, noting a “big sub beat,” a “robust content slate” and concluding that “Netflix’s ad tier launch is off to a solid start.”
Wedbush analyst Michael Pachter similarly took his price target from $400 to $410 and reiterated his “outperform” rating in his report “Growth Is Easy if You Retain Customers.”
“We think Netflix is well-positioned in this murky environment as streamers are shifting strategy and should be valued as an immensely profitable, slow-growth company,” he wrote. “We think Netflix made a great decision to launch an ad-tier, as growth had stalled in the U.S./Canada and was heading toward full market saturation in Europe, the Middle East and Africa. The bottom line is that even while ads are not yet directly accretive (and we think they will be increasingly accretive over time), the ad-tier should continue to reduce churn and draw new subscribers to the service. We saw this in the fourth quarter and expect this to continue to drive a re-acceleration of subscriber growth. This should contribute increasingly to free cash flow generation as Netflix continues to improve its content quality and lower overall spend per subscriber.”
Wells Fargo’s Steven Cahall is also bullish on the streamer, on which he has an “overweight” rating with a $400 stock price target, but cautioned investors that the stock could be taking “a pause til summer” after a recent run-up. “Having run from $200 per share, a lot of improvement is now baked in,” he explained in his report, aptly titled “Run, Pause, Run.”
“We expect the stock to take a pause in the mid-$300s for a bit since the first quarter will see lower earnings and margins year-over-year (mostly content timing) and paid (password) sharing will start to impact net adds,” the analyst detailed. “Second-quarter net adds should be better versus the first quarter due to paid sharing benefits (we’re at +2 million/+3.8 million for the first/second quarter), while the foreign exchange headwinds also abate sequentially. So, from now until second-quarter results in July the stock may tread water. We think momentum will resume in the second half.”
The Wells Fargo expert projects an acceleration in growth that “will likely come from advertising gaining scale, which we see as nearly a foregone conclusion over time,” projecting 2023 ad revenue of $1.3 billion, followed by $4.2 billion in 2024 and $8.1 billion in 2025. “Paid sharing is uncertain in the short term, but similarly incremental in the medium to long term,” he added.
Cahall also highlighted the importance of Netflix’s programming slate. “Content performance is underpinning all aspects of financial improvement and helps investors sleep better,” he wrote. “Downside risk is mostly about the content pipeline weakening materially, and we think the first half of 2022 was a rare content air pocket.”
But Benchmark analyst Matthew Harrigan remains a Netflix bear, maintaining a “sell” rating, even though he pushed his stock price target from $225 to $250. “Advertising and Password Sharing Initiatives Incrementally Address SVOD Maturation, Not Step Function Gains,” he summarized his view in the headline of his report.
He noted that the stock had already been trending higher in pre-market trading “on a fourth-quarter member gain beat, guidance and ‘ridiculously early’ indications advertising initiatives and the 2023 password-sharing crackdown should be … accretive.”
Some Wall Street observers also chimed in on the management rejig at Netflix, with Hastings focusing on the executive chair role, while COO Greg Peters was promoted to the role of co-CEO alongside Ted Sarandos, who has held that title since July 2020. Hastings noted on Thursday that the change in the executive suite had been in the works for some time. Sarandos formerly also served as chief content officer of Netflix, while Peters was chief product officer.
“Reed Hastings is stepping aside, and we view him as one of the most successful and visionary entrepreneurs of our generation,” Mahaney wrote. “BUT the Netflix bench is deep.” PP Foresight analyst Paolo Pescatore similarly said that Hastings’ dropping the co-CEO titles “seems like a shock, [but] timing is key. He has been at the helm for some time and every company needs to change, move with the times. He will still be closely affiliated with the company.”
Meanwhile, Guggenheim’s Morris highlighted: “We see Peters as offering [a] complementary skill set to incumbent co-CEO Ted Sarandos.” And Blackledge said: “We do not expect any material change to either strategy or operations following the succession announcement and would expect Mr. Hastings to remain involved at the board level.”
Benchmark’s Harrigan even argued that “the elevation of tech savvy AVOD advocate COO Greg Peters as co-CEO is a significant positive with Reed Hastings now executive chairman. Bela Bejaria is now chief content officer, with co-CEO Ted Sarandos vacating the position. We are admittedly surprised at the timing, although this is a smooth transition given the team’s working familiarity.”
Third Bridge analyst Jamie Lumley was less bullish on the change. “Reed Hastings stepping down from his current role raises a lot of questions about Netflix’s future strategy,” he said. “While the subscriber growth numbers are encouraging, revenue growth is sluggish with the backdrop of a potential recession looming on everyone’s mind. Incoming co-CEO Greg Peters will have a number of major decisions on his plate from managing high levels of expenses, password sharing and cracking the code to find the next Stranger Things.”
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