Netflix Analysts Upgrade Stock, Boost Price Targets After Quarterly Results

Reed Hastings and Ted Sarandos

Netflix co-CEOs Reed Hastings and Ted Sarandos

"We've gone from a historical bear on Netflix to a card-carrying bull," writes one Wall Street observer. Another one says that "positive free cash flow going forward marks a new chapter."

Netflix's better-than-expected fourth-quarter subscriber additions and improved free cash flow forecast led several Wall Street analysts on Wednesday to boost their price targets for the global streaming giant's shares, with at least two also upgrading their stock ratings.

Netflix, led by co-CEOs Reed Hastings and Ted Sarandos, late on Tuesday said that it added 8.51 million subscribers during the fourth quarter, more than the 6 million targeted in a sign that the coronavirus pandemic has been a stronger force than competition from new streaming services. The fourth season of The Crown and new hit shows The Queen’s Gambit and Bridgerton were among the original fare launched during the latest period.

Netflix management also raised its 2021 forecast for free cash flow and said it would start looking at potential stock buybacks for the first time since 2011 in what Wall Street took as a signal of confidence.

Before Wednesday's stock market open, Netflix shares were up 14.4 percent, or more than $70, at $574.50 in pre-market trading, close to their all-time high of $575.37. During the first trading hour, they hit a new all-time high of $577.77 before more recently trading at around $570.

Wells Fargo analyst Steven Cahall upgraded the stock from "equal weight" to "overweight" and boosted his stock price target by $190 to $700, writing: "We've gone from a historical bear on Netflix to a card-carrying bull." He added that his upgrade comes as "the victor(s) in global streaming get the spoils."

The coronavirus pandemic "supported stronger subscriber acquisition, but what has really impressed is how unit economics are coming through," the analyst wrote. "Netflix's leadership position gives it ample flexibility, now including (stock) buybacks. Few competitors will be able to keep up since 200 million-plus subs is perhaps the bar for decent returns, so this is rarified air."

UBS analyst Eric Sheridan also upgraded his recommendation from "neutral" to "buy" and increasing his price target by $110 to $650.

Pivotal Research Group analyst Jeff Wlodarczak, in a report entitled "Strong Better Than Expected Results," maintained his "buy" rating on Netflix and boosted his stock price target by $90 to a Wall Street high of $750.

"The company appears to operate in a virtuous cycle as the larger their subscriber base grows (and their average revenue per user increases), the more they can spend on original content, which increases the potential target market for their service (and reduces existing subscriber churn) and enhances their ability to take future price increases and dramatically increases barriers to entry," he argued. "Ultimately Netflix will (continue to) be the dominant global SVOD player with Disney+/Hulu a complementary, with Amazon on the periphery, and there is a reasonable shot that AT&T management will mismanage HBO (in similar fashion to DirecTV) as a competitor."

Disney+, widely seen as the most successful streaming service launched by Hollywood conglomerates so far, had 86.8 million subscribers as of Dec. 2.

Guggenheim Securities analyst Michael Morris, who has a "buy" rating on Netflix, raised his stock price target by $30 to $625. And Cowen's John Blackledge, who has an "outperform" rating, raised his target by $25 to $675. Lauding a "big sub beat," he also highlighted that "positive free cash flow going forward marks a new chapter."

Indeed, Netflix on Tuesday reported positive free cash flow for 2020 to the tune of $1.9 billion, a clear reversal from the 2019 loss of $3.3 billion, and forecast it will roughly break even for 2021, followed by free cash flow profits after that. "We no longer have a need to raise external financing for our day-to-day operations," as it has often done in the past by raising debt, the company concluded.

Blackledge acknowledged that Netflix's guidance for first-quarter global net subscriber additions of 6 million fell below his estimate for around 8.55 million, but emphasized: "Management underscored that they are still working through some of the sub net add pull-forward from the first half of 2020; however they believe that the long-term growth trajectory for subs is as strong as ever."

Meanwhile, MoffettNathanson analyst Michael Nathanson and Macquarie's Tim Nollen maintained their "neutral" ratings on Netflix's stock, while upping their price targets by $45 to $465 and by $100 to $600, respectively.

Nathanson, who revising his financial forecasts for the latest trends and the planned stock buybacks, which will increase earnings per share, explained why he remains less bullish than others on Wall Street, writing: "Given our belief that the market will favor a cyclical re-opening trade and Netflix’s tough first-half 2020 comparisons, we would think this stock is range-bound near-term."

And Nollen explained: "We appreciate the margin expansion and free cash flow turning positive could be drivers of sentiment, yet remain on the fence on the stock as competition is rising, bringing increases in content and marketing costs in 2021 after an unusually strong 2020."

Meanwhile, one of Wall Street's biggest Netflix bears, Wedbush Securities' Michael Pachter, maintained his "underperform" rating, even while raising his stock price target by $105 to $340 and acknowledging that the firm "has consistently surprised us by keeping its foot on the gas pedal for subscriber growth, while benefiting from a disruption in production to generate positive free cash flow."

He concluded: "While we are far more constructive about Netflix than we have been at any point in nearly a decade, we continue to question its valuation."

Why? "We think it is reasonable to give the company credit for $1 billion in annual free cash flow growth for the balance of the decade, starting at breakeven in 2021. That will bring 2030 free cash flow to $9 billion," Pachter wrote. That gets him to an enterprise value of $162 billion, "far below Netflix’s enterprise value in the after-market," the analyst explained. "This enterprise value results in a 12-month price objective of $340, well above our prior target of $235. We have been consistently wrong about Netflix, but optimism about the company’s potential to generate free cash flow growth of more than $1 billion per year seems to us to be misplaced."