Bearish Analyst Regrets Not Upgrading Netflix To Buy In 2023

Benchmark analyst Matthew Harrigan maintained Netflix Inc NFLX with a Sell and raised the price target from $555 to $720.

Harrigan noted Netflix is executing significantly better than other media companies with significant global scaling advantages even if the stock appears overpriced in a momentum market.

As paid-sharing benefits subside, top-line and profitability growth will increasingly depend on pricing and newer initiatives such as AVOD (advertising-based video on demand).

Also Read: Netflix’s NFL Push Signals Shift In Sports Streaming Landscape, Analyst Says

The analyst regretted not upgrading the stock from Sell to Buy in early 2023 after having probably the most visible hostile posture on the stock during its 2022 swoon.

Benchmark’s thesis remains that consumer preference and profit models dictate more momentum toward a unified global television spending TAM for connected TV, linear advertising, and subscription. This note includes an updated AVOD model influenced by new global connected TV advertising estimates from GroupM and others.

Netflix is now executing well on appealing creative content, including marquee IP, such as the new Squid Game season.

Even beyond an intelligent sports approach emphasizing special live events, sports documentaries, and sports entertainment, Netflix is also dropping non-fiction content, including biohacker Silicon Valley entrepreneur Bryan Johnson.

Netflix’s move fast and break things approach, a Silicon Valley rather than media company mentality, has enabled eclectic hits, including Stranger Things and Squid Game, and off a significant lead in international programming. This entails embarrassing flops, likely including a new cookery show from Meghan Markel. Competing old media company streaming entrants, including Peacock and Max, are creating more breakthrough content and have narrowed the gap in pure technology aspects, including streaming Quality of Service (QoS) and scaling.

Even with the company’s admittedly exemplary execution assumptions underlying the new target, they are optimistic. These include Netflix reaching 490 million members in 2033 with a ~37% operating profit margin and an eight-year discounted cash flow approach that assumes a normalized 37 times P/E for the index in estimating the cost of equity. This compares to a median Nasdaq 100 multiple in the 23.5 times vicinity, implying Netflix would be vulnerable in any sell-off in the tech-heavy index.

Although the global TAMs for TV subscriptions and high-growth connected TV advertising revenues are substantial, these overall subscription and advertising markets are highly mature relative to the AI-related names driving the Nasdaq 100.

Harrigan projected fourth-quarter revenue of $9.83 billion and EPS of $3.88.

Price Action: NFLX stock is up 0.16% at $888.16 at the last check on Friday.

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