Netflix Analyst Says TikTok Is The Worry - And Billions In Cash Are On The Line

Benchmark analyst Matthew Harrigan reiterates that Netflix Inc NFLX has a Sell and a $250 price target.

Harrigan remains cautious on Netflix even as stock price action remains choppy despite Sunday's Bloomberg report indicating its ad-supported service has gained approximately one million active users stateside after its second month on the market. 

Advertising initiatives and the nettlesome password sharing crackdown should be ARM accretive but, in Benchmark's view, essentially position the stock to offset SVOD competitive pressure. 

The analyst fully expects Netflix's advertising alternative to emerge as a significant member share component. 

Harrigan also suggested, with Netflix declining comment, that the advertising user base grew 500%+ in its first month and another 50% in its sophomore month, given the law of small numbers and access to a huge member base. 

Netflix is subject to the same difficult streaming market conditions as its peers, even as its operating margins benefit from maturity relative to newer entrants.

Netflix has broadened its initiative to include Canada, Portugal, and Spain to complement the beta countries of Chile, Costa Rica, and Peru, where there was considerable anecdotal pushback. 

There is uncertainty around how the U.S. push could impact 2Q U.S. growth, especially management's expectation for sequential growth.

On March 20, Netflix indicated 70 games in development with external partners and sixteen at its in-house studios. It has released 55 games, with 40 in the queue for this year.

The analyst still estimates AVOD could provide $15 to $38 in share value depending on the time frame, subject to execution. 

Beyond the AVOD introduction and streaming competition, Generation Z's preference for short-form TikTok content versus traditional linear streaming content is another competitive element. Netflix's share of U.S. TV time is now 8%.

Netflix generated $0.3 billion in free cash flow during Q4 FY22, down from $0.6 billion a year ago. The FCF compares to a current market cap of $136 billion. Netflix had a gross debt of $14 billion in Q4 and net debt of $8 billion.

Price Action: NFLX shares traded higher by 0.55% at $306.80 on the last check Tuesday.