Stock Analysis & Ideas

Netflix Stock (NASDAQ:NFLX): Can It Regain Its Sky-High Multiple?

Story Highlights

The streaming wars may have cooled off amid broader market pressures. Still, Netflix and its rivals will be in for the fight of their lives as industry dynamics shift with the growing adoption of ad-based tiers and expansion into parallel services.

Shares of streaming kingpin Netflix (NASDAQ: NFLX) have quietly rallied 45% off their lows, as investors began to shrug off subscriber loss concerns that helped drag the stock down more than 75% from peak to trough. Undoubtedly, investors have soured on the streaming industry in a big way. With a growing number of strengthening rivals funneling ample investment into streaming tech and exclusive content, it’s difficult to imagine a scenario where Netflix stock gets its sky-high 2021 multiple back.

Indeed, it’s been a tough valuation reset for Netflix shareholders. The FAANG stock used to be one of the most compelling of the batch. Now, investors and analysts are looking to other acronyms to describe this market’s tech leaders, and they don’t include Netflix, which has some work to do if it’s to command a more premier price tag.

It’s not just Netflix that’s imploded. The entire streaming industry has been under considerable pressure this year ahead of a recession year. The industry has matured, and potential growth to be had from the space is starting to look quite modest.

Some pundits may wonder if spending vast sums of cash to attract subscribers is worthwhile. Add streaming’s churn problem (subscribers may cancel after viewing their favorite content) and ad-based tiers into the equation, and valuing any streaming company has become a lot more complicated.

Indeed, many investors may be inclined to err on the side of caution regarding streaming newcomers. Paramount Global (NASDAQ: PARA) and Warner Bros. Discovery (NYSE: WBD) sport price-to-book (P/B) multiples well below one. As streaming rivals continue investing in their DTC platforms, Netflix needs to show that it’s worth a substantial premium to its up-and-coming smaller brothers in the media space.

As Netflix continues doubling down on quality content that sticks while expanding its circle of competence to include video games, I do think Netflix stock can claw back subscribers (and a higher multiple) through and after a recession.

I remain bullish on Netflix stock at $237 and change per share.

Ad-Based Tier and Increased Competition Complicate NFLX’s Valuation

Netflix and the streaming industry are in for significant changes over the coming 18 months. With inflation and a recession taking a toll on consumer budgets, demand for cheaper, ad-based tiers is bound to rise. Netflix is getting into ad-based streaming with hopes that such a move will not cannibalize its higher-cost tiers. While cost may be one factor fueling recent Netflix subscriber cancellations, a lack of content relative to peers may be a bigger concern.

Now, Netflix still has one of the deepest and strongest content libraries in the space. That said, the number of options has grown, and that’s likely helped fuel increased churn. The Apple (NASDAQ: AAPL) TV+ streaming platform essentially came from out of nowhere over the past year, making quite a bit of noise at this year’s Emmy Awards.

Undoubtedly, Apple TV+ was a streamer you could have counted out of the game when it launched a few years ago. Now, the low-cost option gives consumers more reason to cut the Netflix cord. As Warner Bros. Discovery consolidates its streaming service, Netflix’s dominance will be put to the test.

In any case, Netflix still has the means to expand its lead, even as its rivals’ content libraries swell in size. Netflix has the money to spend on must-see shows such as SandmanSquid Game, and The Crown. As long as Netflix has such quality content, viewers will come, and an ad-based tier, I believe, could help Netflix gain an edge over lower-cost rival services.

It’s hard to tell how the ad-based tier will shift the competitive landscape and Netflix’s fundamentals. Regardless, the company is taking steps to turn the tables back in its favor. If it can reverse subscriber bleeds going into a recession with the help of a lower-cost tier, I think the current 21.7x trailing price-to-earnings (P/E) multiple may be too low.

Next Phase of Streaming: The Bundling Wars?

The bundling of entertainment services seems to be the hot trend for content creators of late. Apple’s streaming platform is bundled alongside a broad range of other subscriptions. The savings for consumers make such bundles tough to unsubscribe from. Netflix has recognized that entertainment bundling may be the future of streaming, and it’s ready to compete with a video-gaming service that many users and investors may be too quick to discount.

It’s been a slow start for Netflix’s gaming push. However, it has begun to make some noise among hardcore mobile gamers, with titles like Stranger Things: 1984. Despite the growing roster of mobile games available to Netflix subscribers, many have yet to try them.

Perhaps Netflix’s ad-based tier can shed more light on the intriguing games and experiences.

What is the Prediction for NFLX Stock?

Turning to Wall Street, NFLX stock comes in as a Hold. Out of 32 analyst ratings, there are nine Buys, 18 Holds, and five Sells.

The average Netflix price target is $242.00, implying upside potential of 2.1%. Analyst price targets range from a low of $157.00 per share to a high of $365.00 per share.

Conclusion: Don’t Count Out NFLX Yet

Netflix stock has been in the doghouse for quite a while. With massive change up ahead, the magnitude of uncertainty is nothing short of profound. Still, investors that have faith in Reed Hastings could have a lot to gain by giving the streamer the benefit of the doubt.


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