Netflix is ​​back! But is the stock already overpriced (again)?

The Great Netflix Recovery is a good story, but Moffett Nathanson wonders if investors should believe it.

“Thank God we’re done with shrinking quarters,” Reed Hastings said during a Q&A for the investment community Tuesday after revealing Netflix’s third-quarter earnings, which included adding 2.4 million global subscribers .

Long-term shareholders breathe a sigh of relief next to the streamer’s co-founder and co-CEO. While NFLX shares are nowhere near last year’s highs, they are up 15 percent. Strong Q3 performance after two poor quarters prompted Wells Fargo to open its investor note with the statement “The dark days are over.”

“The worst is emerging behind Netflix,” the bank’s equity analysts wrote, adding that it’s “hard now to see sub-losses in the years to come” — particularly with the ad-supported option looming. Netflix expects to add 4.5 million subscribers worldwide in the last quarter of 2022. That’ll be the last internal forecast they share, as subscribers just won’t carry as much weight as they used to after advertising muddies these waters (but no doubt raises the tide). ).

Not only will the streamer’s “Basic with Ads” plan attract new consumers and create a needed revenue stream, it could also help reduce churn — the loss of subscribers — in a tough economic climate fraught with inflation and currency woes is. By offering the relatively inexpensive safety net of an AVOD tier, Netflix could potentially “capture” cost-conscious customers who might otherwise have canceled the service outright. The new crackdown on password sharing will also provide a near-automatic revenue boost, albeit more than a few feathers in the process.

“We expect stocks to see one more not-bad rally,” Wells Fargo equity analysts wrote in a note to clients last night. By the time the note landed in our inbox, it was already in full swing – shares of NFLX are currently trading for around $275. With Wells Fargo’s NFLX price target unchanged at $300, the stock has about $25 off its benchmark.

If NFLX shares hit Wells Fargo’s steady target, they would still be $400 below Netflix’s 52-week high. It would be a gain, though: Wedbush’s new NFLX price target of $325 per share, revised up from $280.

Wedbush analysts are excited about Netflix’s current free cash flow positioning, which they believe should grow “significantly” over the coming years.” They believe Netflix “should be valued as an immensely profitable, slow-growing company.” . And who will refuse “immensely profitable”? Well, maybe Moffett Nathanson.

(AUSTRALIA OUT) Netflix Co-Founder and CEO Reed Hastings is in Sydney on February 25, 2022 to meet with executives from other subscription streaming services. (Photo by Wolter Peeters/Fairfax Media via Getty Images)

Netflix co-founder and co-CEO Reed Hastings

Fairfax Media/Getty Images

Media analysts at Moffett Nathanson also raised their target price on NFLX today — but in a far more modest tone. In fact, in the eyes of Michael Nathanon’s gang, Netflix shares already hit their new target ($240 vs. $230) before the company even released its third-quarter results after the market close on Tuesday. In other words, these guys (they’re all guys) think Netflix is ​​currently overrated.

It’s as if Reed posed for the above image immediately after reading the Nathanson note. (He didn’t; the photo is from February 2022, probably around the same time Hastings first realized Q1 was going to be a disaster.)

Moffett Nathanson’s position is essentially this: the bleeding stopped and Tuesday offered a sigh of relief by returning to subgrowth; Cold. But the third-quarter financials actually “doesn’t support where the market has taken the stock to date.”

They’re particularly concerned about low RPU (revenue per user) in the Asia Pacific region, including India, which offers the greatest remaining growth potential for Netflix. Ads will help, but they will only add so much. And Netflix’s organic revenue growth has already slowed, MoffettNathanson noted, with three-quarters of current revenue growth coming from price increases. It’s not every year, or as they put it, “Clearly a risk and may not be repeatable in 2023.”

While everyone is welcoming the AVOD addition, Moffett Nathanson is a little worried about how current subscribers will react to password crackdowns. Unless it’s a total PR disaster (and the ad turnaround pays off in full), analysts can see a future where Netflix will revisit other “key strategic traits,” including: “The binge release strategy.” , the reluctance to use large cinema windows to create buzz and awareness, the lack of off-platform content syndication, and the avoidance of live content.”

Neither of these are currently under consideration, but it sounds like there’s room for a renewed acceleration in revenue growth. Currently, analysts can only work with what they have. So right now, you NFLX buyers are paying too much based on Netflix’s actual “short-term profitability,” MoffettNathanson wrote. “Given the massive surge in NFLX’s share price, the market has clearly voted, once again proving the adage that the best growth stock needs two things to make it work: a story and investors who believe in the story.”

Storytelling has always been Netflix’s forte.

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Lindsay Lowe

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