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Netflix Is Back! Are You Ready to Overpay for Its Stock?

The Great Netflix Recovery is a good story, but Moffett Nathanson questions if investors should believe it.

Fate The Winx Club Saga Season 2. Hannah Van Der Westhuysen as Stella in Fate The Winx Club Saga Season 2. Cr. Steffan Hill/Netflix © 2022.

Hannah Van Der Westhuysen as Stella in “Fate The Winx Club Saga” Season 2

Steffan Hill/Courtesy of Netflix

“Thank God we’re done with shrinking quarters,” Reed Hastings said during a Tuesday Q&A for the investment community after revealing Netflix’s third-quarter earnings, which included the addition of 2.4 million global subscribers.

Longterm shareholders are breathing a sigh of relief alongside the streamer’s co-founder and co-CEO. While nowhere near year-ago heights, NFLX shares are up 15 percent. The strong Q3 performance on the heels of two bad quarters led Wells Fargo to open its investor note by declaring “The dark days are over.”

“The worst appears behind” Netflix, the bank’s equity analysts wrote, adding that it’s “now tough to see sub loss in future years” — especially with the upcoming ad-supported option. Netflix expects to add 4.5 million global subs in the final quarter of 2022. That will be the final internal forecast they share, as subscribers simply won’t carry as much weight as they once did after advertising muddies those waters (but undoubtedly rises the tide).

Not only will the streamer’s “Basic with Ads” plan attract new consumers and add a needed revenue stream, it could also help reduce churn — the loss of subscribers — in a difficult economic climate fraught with inflation and currency concerns. By offering the relatively inexpensive safety net of an AVOD tier, Netflix could potentially “catch” cost-conscious customers who might have otherwise cancel the service outright. The new password-sharing crackdown will also provide a near-automatic infusion of revenue, even if it ruffles more than a few feathers in the process.

“We expect the shares to have a not-bad-anymore rally,” the Wells Fargo equity analysts wrote in a note sent to clients late last night. By the time the note landed in our inbox, that was already well underway — currently, shares in NFLX are trading for around $275. With Wells Fargo’s unchanged NFLX price target at $300, by their yardstick, the stock has about $25 left to go.

Should NFLX shares reach Wells Fargo’s steady target, they’d still be $400 shy of Netflix’s 52-week high. It would be a win, though: Wedbush’s new NFLX price target of $325 per share, revised up from $280.

Wedbush analysts are stoked about Netflix’s current positioning for free cash flow, which they think should see “significant” growth in the years to come.” They believe Netflix “should be valued as an immensely profitable, slow-growth company.” And who is going to turn down “immensely profitable?” Well, maybe Moffett Nathanson.

(AUSTRALIA OUT) Netflix co-founder and CEO, Reed Hastings, is in Sydney to meet with executives of other subscription streaming services, February 25, 2022. (Photo by Wolter Peeters/Fairfax Media via Getty Images)

Netflix co-founder and co-CEO Reed Hastings

Fairfax Media/Getty Images

Media analysts at Moffett Nathanson also increased their target price for NFLX today — but in far more modest key. As a matter of fact, in the eyes of Michael Nathanon’s gang, Netflix shares already hit its new target ($240, up from $230) before the company even reported its Q3 results after the market closed on Tuesday. In other words, those guys (they’re all guys) believe Netflix is currently overvalued.

It’s like Reed posed for the above picture immediately after reading the Nathanson note. (He did not; the photo is from February 2022, probably right around the same time Hastings first realized Q1 was going to be a disaster.)

Moffett Nathanson’s position is basically this: The bleeding stopped and Tuesday offered a sigh of relief by returning to sub growth; cool. But third-quarter financials are actually “not supportive of where the market has pushed the stock up to today.”

They’re particularly concerned about low RPU (revenue per user) in the Asia-Pacific region, including India, which contains the largest remaining growth potential for Netflix. Ads will help, but they’ll only add so much. And Netflix’s organic revenue growth has already decelerated, MoffettNathanson noted, with three-quarters of the current revenue growth coming from price hikes. Can’t do that every year, or as they put it: “Clearly a risk and may not be repeatable in 2023.”

While everyone is applauding the AVOD addition, Moffett Nathanson is a bit worried about how current subscribers will respond to the password crackdown. If it’s not a total PR disaster (and the advertising about-face pays off to its fullest potential), the analysts can see a future in which Netflix re-examines other “key strategic features,” including: “the binge release strategy, the reluctance to use wide theatrical windows to build buzz and awareness, the lack of off-platform content syndication, and the avoidance of live content.”

None of those are currently under consideration, but it sounds like there’s room for the re-acceleration of revenue growth. For now, analysts can only work with what they’ve got. So for now, you NFLX buyers are overpaying based on Netflix’s actual “near-term earnings power,” MoffettNathanson wrote. “Given the massive bounce in NFLX’s share price, the market has clearly voted and once again proves the adage that the best growth stock needs two things to work: a story and investors that believe the story.”

Storytelling was always Netflix’s strength.

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