Shares of fallen streaming darling Netflix (NFLX) nudged 1.2% higher on Wednesday after it announced a partnership with Microsoft (MSFT) on its much-anticipated ad-supported tier.
Undoubtedly, Netflix needs to pivot to regain its growth multiple. While the 73% slide has been violent, bringing the price-to-earnings (P/E) multiple in the 17 times range, I do think there are plenty of levers that CEO Reed Hastings can pull to get the fallen FAANG stock back on track.
For now, all eyes are set on Netflix with ads. Ahead of an economic slowdown, the service could have the potential to be a hit as consumers seek to save a bit of money where possible. I am bullish on Netflix.
Despite their size, FAANG stocks always find a way to leverage technological innovation to keep their growth rates alive. Now that the video-streaming market has matured, Netflix needs to expand into new frontiers.
Just as various members of the FAANG cohort have renamed their firms to mark a change in direction or a broadening of focus, Netflix needs to adapt or run the risk of dropping further.
Now, Netflix has already endured quite a hit to its multiple. At around 17x earnings, one has to think that the valuation reset is nearly concluded. With a headwind hurricane of higher rates, intensifying competition, and waning consumer budgets continuing to weigh on quarterly results, Hastings’ job will not be easy.
Some of Netflix’s streaming and media peers trade in the single-digit P/E range. Though Netflix is a far higher-quality content provider, it must find ways to distance itself from rivals if it’s to command a premium. Like it or not, today’s depressed multiple may not be depressed enough if Netflix can’t pivot effectively.
Netflix Teams Up with Microsoft for Ad-Based Subscriptions
The Microsoft partnership on its ad-based subscription is just one intriguing lever that Netflix has pulled. Coincidentally, Microsoft is also the tech titan behind the “Netflix of gaming” service named Xbox Game Pass.
I think the Netflix-Microsoft partnership is one that could benefit both sides greatly. Further, if the partnership shows promise, it could act as a launchpad for other partnerships. Undoubtedly, a subscription that includes Netflix and Xbox Game Pass — the Netflix of games — could be a bundle that’s impossible for consumers to pass up.
With Microsoft’s acquisition of Activision Blizzard (ATVI) pending, a Netflix takeover seems doubtful at this juncture. In any case, partnerships may be key to helping both sides thrive in the fast-moving entertainment space.
As Netflix looks to double down in video games, Microsoft may be able to chime in at some point down the road.
Netflix with Ads Could Help Stock Fare Better in a Recession
It’s hard to gauge how an ad-supported tier will affect coming quarterly results. Indeed, many of today’s sticky, paying subscribers could embrace a lower-cost, ad-supported tier to save a few bucks.
Still, I think such a tier beckons many of the subscribers that canceled in the first half of 2022. Indeed, Netflix may not have had the strongest content slate in the first quarter of 2022. However, the primary driver of cancellations may be the overwhelming weight of inflation on consumer budgets.
The ad-based tier solves such an issue and could help Netflix win back its lost customers and then some as we inch closer to an economic slowdown.
Further, new content and the inclusion of more mobile games could help Netflix sweeten the pot for its users. In tough times, people still want to be entertained. They’ll just be more selective with how much money they’re spending to be entertained.
With hundreds of video games likely to come out of the Netflix pipeline over the coming years, the firm seems on the right track. It’s willing to offer consumers more value rather than just seeking to target freeloaders and raise prices — moves viewed as hostile to certain consumers.
Wall Street’s Take on NFLX
Turning to Wall Street, NFLX stock comes in as a Hold. Out of 41 analyst ratings, there are 10 Buys, 25 Holds, and six Sell recommendations.
The average Netflix price target is $258.58, implying an upside of 36.7%. Analyst price targets range from a low of $157.00 per share to a high of $400.00 per share.
NFLX’s Smart Score Rating
Interestingly, NFLX has a 6 out of 10 Smart Score rating on TipRanks. This implies that it is likely to perform in line with the market and is in line with analysts’ consensus Hold rating.
The Bottom Line on Netflix Stock
Netflix is in a world of pain right now, but there are reasons to believe that most headwinds have fallen into the rear-view mirror. The ad-based tier could help Netflix stock sail through the coming economic slowdown en route to much higher levels.
The Microsoft partnership is a big plus and could be the start of further mutually-beneficial relationships between the two entertainment heavyweights.