Goldman Sachs Upgrades Netflix As Subscribers Return, But Competition Raises Challenges Ahead

Goldman Sachs‘ equity research team, led by Eric Sheridan, has upgraded video streaming platform Netflix NFLX from Sell to Neutral.

The firm also raised the price target from $230 to $400, citing Netflix’s current operating performance and positive momentum heading into 2024 and, eventually, 2025. Still, the revised price target is 9% lower than the current stock price.

The neutral rating recognizes the limited visibility into the path to a significant upside, analysts said in the note. However, the likelihood of underperformance in the coming quarters has declined for Netflix.

Factors Influencing Netflix’s Recent Performance

Los Gatos, California-based Netflix is up 50% year to date, outperforming the Nasdaq 100 Index, as tracked by the Invesco QQQ Trust QQQ, which is up 40%.

According to Goldman Sachs, Netflix management has exceeded expectations by successfully implementing its password crackdown initiative. The company has also regained content creation momentum, mitigating any post-pandemic growth headwinds.

Goldman believes Netflix will report subscriber performance that exceeds Street expectations when it releases its second-quarter results on July 19.

The Street’s consensus estimates an earning-per-share of $2.86 for Q2 2023, flat from Q1 2023 but down 5% from Q2 2022. Neflix’s revenues are expected to rise to $8.27 billion, up 1.1% from Q1 2023 and 3% from Q2 2022.

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Global Streaming Competition

The escalating global competition in the streaming industry is one of the negative factors highlighted by Goldman Sachs.

Amazon Inc. AMZN’s Prime Video was the most popular streaming service in Canada, France, Italy, India, and Japan, while Walt Disney Company DIS’s Disney+ ranked first in the United Kingdom, Germany, and Australia.

Goldman Sachs analysts believe the level of competition from traditional media companies and platforms willing to invest heavily could have an impact on Netflix’s content spending assumptions.

Competitors’ higher-quality content and better consumer experiences could put Netflix’s subscriber growth and pricing power assumptions to the test, they explained.

If competition eases, Netflix may see additional upside in terms of subscriber growth, average revenue per user (ARPU), and content spend.

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