Here’s Why Netflix (NASDAQ: NFLX) Shares Look Cheap

For investors of Netflix (NASDAQ: NFLX), it’s been a sluggish year. Shares are trading at the same prices they were at last July, having stuck within a tight range of about 15% in the meantime. But as the major indices start to hit record highs again, with tech in particular leading the way, it looks like a strong bid is starting to flow back into shares of the California headquartered streaming giant. They’re up 10% in the past fortnight and according to some of the louder voices in the bull camp, they still have a ways to go yet. 
On Friday of last week, the folks over at Credit Suisse upped their rating on Netflix shares from Neutral to Outperform while at the same time maintaining their price target to $586. This suggests there’s an upside of at least 10% to be had from current prices which doesn’t put much pressure on Netflix, so you can imagine Credit Suisse’s team will be revisiting that price target in the coming weeks. 

Favorable Risk / Reward

The reason behind the upgrade came from a consumer survey that Credit Suisse recently ran in the US, which "reinforced the strong competitive position and high user satisfaction" for Netflix. In tandem with this positive market sentiment, Credit Suisse thinks shares look cheap in the context of the current risk/reward profile. They recently bounced off solid support around $480, which is also where the bears have run out of steam multiple times in the past year so you’d be inclined to think this move to the upside is going to gather some pace. 

For those of us on the sidelines and considering opening a position in what’s starting to look like a sleeping giant, this latest update comes off the back of a run of positive comments that bode well for the coming months. Back in May, Jefferies started off their coverage of Netflix with a Buy rating and a $620 price target. There’s a bit more meat on that bone compared to Credit Suisse and were Netflix shares to hit that they’d be at fresh all-time highs and close to 20% higher from where they are currently. 

Analyst Andrew Uerkwitz and his team think that Netflix has "separated itself as the premier, must-have OTT service" even as the actual content creators are "pulling IP content left and right" thanks to the company’s original content push. Uerkwitz forecasted that more than $100 billion would be spent on content over the next five years, a startling number when compared to the $17.5 billion expected in free cash flow, and the $12 billion expected by way of share buybacks.

Around the same time, Melvin Capital Management reported a fresh position in Netflix shares while Loop Capital reiterated their Buy rating on the stock, as well as their $650 price target. These moves came in the wake of Netflix’s Q1 earnings report at the end of April, which smashed analyst expectations for the top line and bottom line numbers but was soft on subscriber numbers. But even with this lower than expected guidance, Scott Devitt from Stifel has since said that “Netflix is still a blue-chip consumer technology company with a "compelling long-term growth story."

Shaking Off The Cobwebs

After logging a weak Q1 and quiet start to Q2 the tech industry has re-awoken from its post-2020 nap, and is displaying all the signs of wanting to lead from the front again for at least the second half of this year. Thomas Lee of Fundstrat Global Advisors recently gave a “double upgrade” to the FAANG group of tech stocks, of which Netflix is a key component. 

Lee thinks the inflation worries that dogged tech in February and March have for the most part petered out, and the road ahead is clear for tech to shake off concerns around higher interest rates and get back to what they do best. With Netflix shares trading at their highest level since April and up again in Tuesday’s pre-market session, they’ve clearly no intention of letting their fellow FAANG members down.