For years, Wedbush was Wall Street’s lone holdout when it came to Netflix. While other investment banks praised the streaming giant’s impressive growth and increased their already lofty price targets with each quarterly report, analysts at the Los Angeles-based investment firm were decidedly bearish.
That all changed this week when Michael Pachter, Wedbush’s lead Netflix analyst, upgraded the company’s stock to an “outperform” rating, reiterating a $280 price target.
Even as his investment banking peers continue to abandon the streaming leader, slashing their price targets amid fading subscriber growth, Pachter argues the company will find its way.
The analyst admits Netflix isn’t the rapidly-growing tech powerhouse it once was, but that doesn’t mean it’s unworthy of investment. Profitability is the yardstick to measure Netflix by moving forward, not revenue growth.
While investors shouldn’t expect Netflix to return to its sky-high valuations of the last few years anytime soon, a 50% jump in share prices is possible in 2023, according to Pachter.
“We don’t believe that Netflix’s share price will approach 2021 levels for many years, but think that our price target of $280 is achievable within the next 12 months,” Pachter wrote in a note on Monday as Netflix’s shares traded at $186. “We find Netflix shares to be a compelling investment.”
Wedbush’s change of heart?
The recent change of tune from Pachter comes after years of bearish reports. Time and again, he had argued that Netflix wasn’t worth the sky-high valuations most investment banks were pushing in an increasingly crowded streaming market.
In April, his bearish views turned out to be right, but his timing, well, was a bit off.
In its first-quarter earnings report on April 19, Netflix revealed it had lost 200,000 subscribers through the first three months of the year and predicted another 2 million customers would abandon its platform by the second quarter. As a result, the company’s shares plunged more than 25% in a single day and are now down almost 70% year-to-date.
It should have been a vindicating moment for Pachter, but just weeks before the collapse, the analyst had raised his Netflix rating from “underperform” to “neutral” and increased his price target to $342 per share, arguing the company had a “nearly insurmountable competitive advantage over its streaming peers.”
In a March interview with CNBC detailing the motives behind his new stance, Pachter described how he was “completely wrong” about Netflix’s ability to create winning content, expand internationally, and fight off the streaming competition. But he didn’t turn entirely into a Netflix cheerleader; the analyst correctly argued that Netflix didn’t have the same growth potential it once did—comments that proved to be prescient when the company revealed its first-quarter earnings.
After Netflix’s April collapse, Pachter maintained his “neutral” rating but cut his price target to $280. Now, he says streaming market saturation and price increases in the U.S. and Canada were the cause of Netflix’s big miss in April, but that doesn’t mean the company is a bad investment.
“We don’t think that the decline in subscribers is permanent, nor do we believe it will prove to be fatal,” he wrote.
While Netflix is no longer the high-flying growth stock it once was, investors should be able to see the value in a company that produces consistent profits, Pachter argues.
“I don’t see these guys as a high-growth, high-profit company. I see them as a low-growth, extremely high-profit company,” Pachter told CNBC in March.
A new model
Netflix’s push towards addressing some of the errors that caused its big subscriber miss is a promising sign, Pachter says.
In particular, the addition of ad-supported content—the company’s executives have said they plan a free tier that comes with commercials—should help the stock to outperform moving forward.
While Netflix’s attempts to “crack down” on password sharing by subscribers may only yield “a few million new customers,” according to Wedbush, an ad-supported streaming model could significantly increase subscribers and reduce “churn”—the rate at which customers leave the platform.
“Netflix’s plan to adopt an advertising-supported subscription has great potential to drive significant revenue, in our view,” Wedbush’s analysts wrote on Monday. “That said, it could also cannibalize existing customers. On balance, we think ad-supported subscriptions is a good idea, particularly as a disincentive to churn.”
Netflix can also limit its subscriber losses by spreading out the release of episodes of its most popular content instead of releasing them all at once for consumers’ binge-watching pleasure, the Wedbush team said. And raising prices in the U.S. will add to the streaming giant’s profitability as it shifts to a new, less growth-centric approach.
Finally, Wedbush expects Netflix will exceed its second-quarter guidance due, in part, to the staggered release date for the Emmy-winning series Ozark.
“We do not expect wholesale changes to occur rapidly; we think Netflix will only gradually raise prices and roll out its ad-supported option,” Pachter explained. “However, we think that the sooner the company shows its commitment to reducing churn by releasing new content over several weeks, investors will see an uptick in subscribers and their confidence in the Netflix business model will be restored.”
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