Netflix Stock: Are Better Times Ahead?

It appears that reports of Netflix's (NFLX, $275.13) demise were greatly exaggerated.

Netflix stock gapped up more than 15% in early Wednesday's trading after the streaming leader easily topped both Wall Street's and its own forecast for subscriber growth. 

The market pretty much always overreacts, both to the upside and downside, in the immediate aftermath of news events like earnings. But there's no doubt Hollywood is breathing a huge sigh of relief on the subscriber news – to say nothing of long-suffering Netflix shareholders.

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NFLX has always been an exceedingly volatile stock, but the current drawdown has been longer and steeper than most. Shares hit a closing peak of $691.69 on Nov. 17, 2021 and had lost 65% of their value before Wednesday's rally.

The fact that Netflix stock traded essentially sideways since its disastrous April earnings release – the one in which the company disclosed its first loss of subscribers in a decade – leaves open the possibility that this latest report could be just the catalyst the stock needs to start grinding higher again.

At least that's what the NFLX bulls contend. They're pinning their hopes on the company's launch of a lower priced, ad-supported tier of service and a crackdown on password sharing.

What the Pros Are Saying

Deutsche Bank analyst Bryan Kraft, for one, upgraded Netflix to Buy from Hold, and raised his price target to $350, in response to the quarterly results.

"We believe we now have visibility into a subscriber growth inflection point next year given that Netflix management has confirmed both the early 2023 introduction of its new measures designed to better monetize account sharing, and the early November timing of its AVOD tier launch in 12 top markets," writes Kraft in a note to clients. "The 100 million 'account borrowers' Netflix has counted represent a clear and present growth opportunity that Netflix will soon be in a position to exploit."

Other analysts, while encouraged by management's initiatives, were less impressed, and remain concerned about intense industry competition and looming recession next year.

"While investor optimism is built with respect to the ad supported tier (correlated with the recent stock outperformance in the run-up to Q3 earnings), we still see an elevated competitive industry level against a post-pandemic backdrop while a potential for a weaker consumer spending dynamic remains into 2023," writes Goldman Sachs analyst Eric Sheridan, who slaps a rare Sell recommendation on the stock. 

Splitting the difference is Raymond James analyst Andrew Marok, who, like most of the Street, rates Netflix stock at Market Perform (the equivalent of Hold). 

"This quarter's report goes a long way toward calming fears spurred by first-half 2022 subscriber declines," notes Marok. "While we still have some reservations around the scaling of new monetization initiatives and the competitive environment, the path to upside looks more feasible now than three months ago."

As noted, Raymond James is very much in the majority on the Street. Of the 42 analysts issuing opinions on NFLX tracked by S&P Global Market Intelligence, 22 call it a Hold. Of the remaining analysts, 14 rate it at Strong Buy, one says Buy, three call it a Sell and two have it at Strong Sell.

That works out to a consensus recommendation of Buy, albeit with mixed conviction. And we'll have to wait and see how NFLX recommendations shake out over the next few days. After Wednesday's rally, Netflix stock shot past the Street's average target price of $261.33. 

As for the valuation, the stock does appear compellingly priced on a forward earnings basis. Shares in Netflix change hands at less than 24 times analysts' 2023 earnings per share (EPS) estimate. That's not a bad price to pay for a company expected to generate average annual EPS growth of 24% over the next three to five years.

Valuation, however, only tends to work its magic over the longer term. If you go by the wisdom of the analyst crowd, the outlook for Netflix over the next 12 to 18 months is something of a coin flip. 

The Bottom Line

The good news is that the bottom for Netflix stock looks to be solidly in the rearview mirror. Whether shares can get back to their market-beating ways over the intermediate term remains to be seen.

That said, Netflix is armed with a credible plan to reinvigorate growth, and some early results to back it up. If nothing else, the outlook for NFLX stock hasn't been this bright in a while.