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At least three firms on Wall Street have upgraded the streaming-video company’s shares this month, citing its planned introduction this year of an ad-supported subscriber tier.
Netflix shares have plunged 60% in 2022, making it the fourth-worst performer in the Nasdaq 100 Index. The bulk of the losses followed a pair of catastrophic earnings reports, including the first quarter since 2011 in which its user base shrank.
The results raised questions about its ability to hold onto pandemic-era gains, an issue the cheaper ad tier could help address. The Wall Street Journal reported that Netflix projects the ad-supported offering will reach about 40 million viewers by the third quarter of 2023.
“Netflix has already taken its medicine, and it has these catalysts ahead that are identifiable and that it can execute on,” said David Klink, senior equity analyst at Huntington Private Bank.
Netflix has long resisted introducing ads to its service, preferring instead to count on must-watch content like “Squid Game” and “Stranger Things” to attract paying subscribers. But with consumers’ finances getting pinched by rising inflation, the company reported a massive customer loss this year. An ad-supported offering with a lower monthly cost could provide a new revenue stream and attract a wider user base.
Even if ads aren’t a panacea for the company’s woes, the stock is more attractive as it offers both value and growth characteristics, said Klink.
“It’s weird to think of Netflix as a value stock, but given the uncertain backdrop, a lot of portfolios would benefit from having a stock like this, that is both offense and defense,” he said.
Oppenheimer was the latest firm to take a more positive view, writing Monday that the ad tier should accelerate subscriber growth. Evercore and Macquarie also adopted more bullish stances, with Evercore calling the ad offering “a clear catalyst on the horizon,” one that “can drive a material re-acceleration in revenue growth.”
The consensus still leans cautious. Fewer than a third of analysts recommend buying Netflix, while more than half have the equivalent of a hold rating. At the start of the year, more than 70% of analysts tracked by Bloomberg had a bullish rating on the stock.
Still, the growing optimism has supported the stock, burning short sellers. Since June 16, a recent closing low for the Nasdaq 100, Netflix is up 41%, compared with a 7.4% gain in the index. Evercore’s upgrade last week contributed to a 2.8% weekly gain for streamer, while the Nasdaq 100 had its worst week since January.
Netflix’s valuation undergirds the bull case: Netflix trades 22 times estimated earnings, versus a 10-year average above 80 and the Nasdaq 100’s 20.6.
Denny Fish, who manages the $4.4 billion Janus Henderson Global Technology and Innovation Fund, said Netflix’s valuation and prospects make it more attractive than other fallen market favorites like Facebook (NASDAQ:META) parent Meta Platforms Inc.
“Growth has slowed, there’s more competition, but it might be one to be more comfortable with over the long term,” he said.
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The selloff in tech stocks last week has shrunk the valuation of the Nasdaq 100 Index, bringing its projected price-to-earnings ratio in line with the benchmark’s 10-year average. Investors could dip back into the sector but they might stay cautious until the Federal Reserve’s rate decision on Wednesday.
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