Netflix is ​​back! But is the stock already too expensive (still)?

Netflix’s big takeover is a good story, but Moffett Nathanson wonders if investors should believe it.

“Thank goodness we’re done with the down quarters,” Reed Hastings said during a Tuesday Q&A for the investing community after revealing Netflix’s third-quarter earnings, which included the addition 2.4 million subscribers worldwide.

Long-term shareholders breathe a sigh of relief alongside the streamer’s co-founder and co-CEO. Although a far cry from the highs of a year ago, NFLX shares were up 15%. Strong third-quarter performance after two poor quarters led Wells Fargo to open its note to investors saying “The dark days are over.”

“The worst appears behind” Netflix, the bank’s equity analysts wrote, adding that it is “now hard to see any under-loss in the years to come” – especially with the upcoming ad-supported option. Netflix plans to add 4.5 million subscribers worldwide in the last quarter of 2022. This will be the last internal forecast they share, as subscribers simply won’t carry as much weight as before after that advertising has muddied those waters (but undoubtedly raises the tide).

Not only will the streamer’s “Basic with Ads” plan attract new consumers and add a much-needed revenue stream, it could also help reduce churn – the loss of subscribers – in a difficult economic climate marked by problems. inflation and currency. By offering the relatively inexpensive safety net of an AVOD tier, Netflix could potentially “catch” cost-conscious customers who would otherwise cancel the service altogether. The new crackdown on password sharing will also provide an almost automatic infusion of revenue, even if it ruffles more than a few feathers in the process.

“We expect stocks to rally quite a bit,” Wells Fargo equity analysts wrote in a note sent to clients late last night. By the time the note landed in our inbox, it was already well underway – currently, shares of NFLX are trading for around $275. With Wells Fargo’s unchanged NFLX price target at $300, by their yardstick, there’s about $25 left on the stock.

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

Wedbush analysts are pleased with Netflix’s current free cash flow positioning, which they believe will see “significant” growth in the coming years. They think Netflix “should be considered an extremely profitable, slow-growing company.” And who will refuse “hugely profitable?” Well, maybe Moffett Nathanson.

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Media analysts Moffett Nathanson also raised their target price for NFLX today – but much more modestly. In fact, in the eyes of Michael Nathanon’s gang, Netflix shares have already hit their new target ($240, down from $230) even before the company released its third-quarter results after the market closed on Tuesday. In other words, these guys (they’re all guys) think Netflix is ​​currently overrated.

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

Moffett Nathanson’s position is essentially this: the bleeding has stopped and Tuesday offered a sigh of relief as he returned to undergrowth; cool. But the third-quarter financial data is actually “not supportive of where the market has pushed the stock so far.”

They are particularly concerned about the low RPU (revenue per user) in the Asia-Pacific region, including India, which holds 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 higher prices. I can’t do this every year, or as they say: “Clearly a risk and may not be repeatable in 2023.”

While everyone applauds the addition of AVOD, Moffett Nathanson is a bit worried about how current subscribers will react to the password crackdown. While this isn’t a total PR disaster (and the advertising flip-flop pays off to its full potential), analysts may see a future in which Netflix re-examines other “key strategic features.” including: “the overbroadcasting strategy, the reluctance to use large theatrical windows to build buzz and awareness, the lack of syndication of off-platform content, and the avoidance of live content.

None of these are currently being considered, but there appears to be room for further acceleration in revenue growth. For now, analysts can only work with what they have. So for now, you NFLX buyers are paying too much based on Netflix’s “short-term earning power,” MoffettNathanson wrote. “Given the massive rebound in NFLX stock price, the market has clearly voted and once again proves the adage that the best growth stock needs two things to work: a story and investors who believe. in history.”

Storytelling has always been Netflix’s strength.