Netflix Bulls Eye Reward After Tests of Patience

Netflix Inc. may no longer be the market darling it was in its heyday, but there is increasing optimism surrounding the stock as earnings loom into view.

(Bloomberg) — Netflix Inc. may no longer be the market darling it was in its heyday, but there is increasing optimism surrounding the stock as earnings loom into view. 

The shares have taken investors on a wild ride over the past few years and Netflix’s potential has been more disputed than other major technology and internet companies. However, recent initiatives — including in advertising and an account sharing crackdown — are expected to bear fruit, while its competitive position looks strong relative to other streaming-video companies. 

“The future of Netflix is one of more durable and steady growth, and the company has put forth a very credible strategy to get there, with a lot of levers it can pull to achieve that,” said Chris Mack, global equity portfolio manager at Harding Loevner. “The stock has a unique value proposition from here, especially relative to other media companies. It has withstood a tough competitive environment, and it looks especially strong now that everyone is looking for profitability.”

Shares rose about 1% on Wednesday.

Ahead of its third-quarter report on Oct. 18, there are signs that Netflix’s crackdown on password sharing is supporting user growth in the US, according to the market researcher Antenna, even as Walt Disney Co. is reportedly struggling with streaming subscribers. The Wall Street Journal reported that Netflix plans to raise prices after the Hollywood strikes have been resolved, a potential sign of its pricing power. 

Wall Street has been warming up to Netflix, following a washout of sentiment that followed a pair of post-pandemic earnings blowups. The stock’s consensus rating — a proxy for its ratio of buy, hold, and sell ratings — is at the highest in more than a year.   

For bulls, Netflix’s attraction can also be found in its current discount to the high price tag it has been known for. It trades at 25 times estimated earnings, a fraction of its 10-year average above 75, and close to the Nasdaq 100’s multiple of 23 times.

The average analyst price target points to more than 25% upside from current levels — similar to the trajectory expected for Disney stock. Netflix shares are up about 27% this year, trailing the rise of the Nasdaq 100 Index. Disney is down about 2%.

Ahead of Reality  

Still, Netflix is trading 46% below a peak hit in 2021, despite more than doubling off a low hit last year. Such swings contrast the relative sturdiness of Apple Inc. or Alphabet Inc., which are prized for the perceived durability of their earnings and revenue streams. While Netflix used to be casually grouped with such stocks, its volatility reflects the difficulty investors have had in determining its prospects.

“Growth issues have kept Netflix from being among the Magnificent Seven,” said Mack, referring to a group of high-flying tech leaders. “It will take time for the doubters to come along with the story, but we’re willing to be patient.”

Earnings have lately been a negative catalyst, with the stock dropping after seven of the past 10 most recent reports, according to data compiled by Bloomberg. Last quarter’s results, which featured a disappointing outlook, triggered its biggest drop of 2023.

On the downside, Chief Financial Officer Spencer Neumann recently said the company isn’t expecting dramatic growth in average revenue per member this year, while its advertising initiative is “not that material yet.” Those comments, along with Treasury yields hitting multi-year highs on concerns over Federal Reserve policy, have contributed to sharp underperformance in Netflix over the past month.

Such uncertainty was articulated by Bernstein’s Laurent Yoon, who began coverage on the stock with a market-perform rating earlier this month. While noting Netflix was “easily the best streamer” and that ads and the password crackdown represent opportunities, “expectations are likely ahead of the reality,” he wrote. 

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The stock has been volatile to the point where “you can have regrets on both sides of the tape, but we see room for upside from here,” said Kevin Landis, chief investment officer at Firsthand Capital Management. 

“It can really hurt if it misses on earnings, but if you’re out of the stock and it knocks its earnings out of the park, that opportunity is gone. More of my regrets are in being out of the stock than holding it,” he added.

Tech Chart of the Day

The Nasdaq 100 Index rose 0.6% on Tuesday, a gain that returned the index above its 50-day moving average. This is the first time it closed above this level, a positive sign of short-term momentum, since mid-September.

Top Tech Stories

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  • Inc.’s fall sale for Prime subscribers kicked off Tuesday with price-conscious shoppers mostly snapping up deals on low-cost kitchen gadgets and apparel rather than splurging on big-ticket items.
  • Lee Fixel’s Addition LP has co-led a round of funding for India’s, deepening a foray into AI after ChatGPT galvanized a wave of investment in the burgeoning field.
  • Google’s Sundar Pichai raised concerns years before he became the company’s chief executive officer that its deal with Apple Inc. had bad “optics” because there was no choice of which search engine to use in the company’s web browser.
  • HP Inc., anticipating that personal computer demand will pick up after a two-year slump, projected profit for the fiscal year beginning in November in line with analysts’ estimates.

–With assistance from Subrat Patnaik.

(Updates to market open.)

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