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Stock Analysis & Ideas

Netflix: Advertising Could Be the Change Required to Boost Sub Growth, Says Analyst

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There have been many pandemic era stars that have lost their luster as normalcy has resumed, but perhaps few narratives have changed as much as the one regarding Netflix (NFLX).

It might have always been inevitable the streaming giant would encounter a significant dialing down of the growth activity seen during the Covid lockdowns, but the extent of the downfall has been particularly eye-catching; along with losing subs – 1Q22 marked the first instance of Netflix losing subscribers in a decade – the share price has come crashing down – to the tune of 71% since the turn of the year.

And now, looking at its current valuation, Stifel analyst Scott Devitt is becoming “more constructive” on the shares.

“We believe the risk/reward has become more attractive as current valuation implies minimal incremental subscriber growth, in our view,” the analyst said. “At the current share price, we believe the market may be overlooking the multi-year opportunity for a return to sustainable subscriber growth, with optionality stemming from the company’s upcoming advertising-supported and password-sharing plans.”

Addressing the recent quarters’ slowing subscriber growth, management pointed to a variety of factors impeding progress. Competitive pressures, the macro environment, and the “prevalence of password sharing,” have all been cited as headwinds. While Devitt does not disagree that these have played their part and have had a “negative impact,” he thinks the main reason for the slow down lies elsewhere.

“We believe affordability challenges have had a more direct impact on the company’s ability to grow in international markets,” Devitt explained. In fact, Devitt notes that in many of the emerging markets where Netflix has yet to make a serious dent, the Basic plan is priced “at well over” 1% of monthly income.

There is a way to address this issue — by adding an advertising-supported subscription tier, something Netflix now plans on implementing.

While Devitt thinks such an initiative can be a game changer, until further details emerge on this strategy, he sticks with a Hold (i.e., Neutral) rating, and lowers the price target from $300 to $240. Devitt, though, might as well have said Buy, given that figure is set to generate returns of ~40% over the coming months. (To watch Devitt’s track record, click here)

All in all, Netflix has 41 analyst reviews, split three ways: 9 Buys, 26 Holds, and 6 Sells. Overall, the consensus view here is a Hold, to wait and see. That said, like Devitt, most of the fencesitters appear to think the shares are now undervalued; going by the $281.84 average target, the stock is expected to add ~64% over the one-year timeframe. (See Netflix stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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