Is Netflix (NASDAQ: NFLX) About To Rise From The Ashes?

Readers will remember, some painfully no doubt, Netflix’s (NASDAQ: NFLX) last earnings report that sent shares down more than 30% in just a few days. The Q4 report, released towards the end of January, was broadly in line with analyst expectations for revenue and EPS, but was way off on the main metric that matters for streaming companies, subscriber growth. And while they’ve continued to tick lower in the weeks since, there are signs that they could soon be putting in a low.

On Wednesday of this week, the Wedbush team were out with a surprise upgrade. Analyst Michael Pachter upped his rating on Netflix stock from Underperform to Neutral. While not quite the same thing as upping it to Outperform, it’s a good vote of confidence for the theory that the current bout of selling has run out of steam. 

Potential Upside

He noted that the recent decline in Netflix's stock reflects the fact that investors have started to appreciate the long-term thesis that it is a "a low growth, extremely profitable enterprise." In a note to clients he added "while we do not anticipate significant share price appreciation in the near-term, Netflix’s first mover advantage and large subscriber base provides the company with a nearly insurmountable competitive advantage over its streaming peers.“

It’s exactly the kind of sell-side update that investors would have been hoping for, and builds on the bullish comments from J.P. Morgan last month. Their analysis of Netflix’s data found that the streaming leader was tracking ahead of plan in early numbers for the first quarter - good news for a "controversial" stock. Average global growth in daily active users had decelerated about 40 basis points year-over-year (to about 11%), but the daily active user numbers were still improving on an absolute basis, which suggests we might be in for an upside surprise in the next earnings report. 

Analyst Doug Anmuth noted with the report findings that “we continue to believe strong secular growth remains in global streaming as Netflix accounts for less than 10% of TV time in the US — its biggest market — and Netflix’s penetration of global broadband households ex-China is less than 30%”. This was enough for him to keep his Outperform rating on the stock, as well as his $605 price target. From where Netflix is currently trading, that suggests there’s upside to be had in the region of 70%, a number that should do more than enough to make a solid risk / reward based argument for getting involved. 

And those optimistic comments from J.P. Morgan echoed those of Citi from the end of January. In the immediate aftermath of the earnings report and just as shares traded back down at 2018 levels, Citi waded in with an upgrade on Netflix shares, moving them to a Buy. Analyst Jason Bazinet felt at the time that “the enterprise value per subscriber analysis suggests prevailing equity values don't assume material sub growth or improving subscriber economics beyond 2023." His $450 price target from that update is still in place, and looks pretty achievable if the stock can start logging a run of green days.

Getting Involved

It will only take a few fresh updates from management to really light a fire under Netflix shares, as January’s earnings report really resulted in the worst case scenario being priced in. Netflix was unlucky in that it came at a time when high growth stocks were coming under intense scrutiny in the face of rising interest rates, a headwind that the company will still have to navigate successfully.

But when you have the CEO of a company putting $20 million of his own money into the stock, you’re inclined to think that maybe the market has overreacted. That’s exactly what Reed Hastings did as Netflix sold off, with Bill Ackman’s hedge fund Pershing Square also using the selling as an opportunity to buy into Netflix for the first time.

It might be a while before shares are trading at $700 again, but that doesn’t mean there’s not a 50% plus rally to be had in the meantime. Investors getting involved should use the $350 level as an entry and emergency exit point for now, and look for shares to tick up into the $400s by the end of March.