Netflix Stages a Comeback

Shares of Netflix (NFLX) plunged -72% from the start of this year to a 5-year low in May, the biggest drop in the Nasdaq 100 Stock Index ($IUXX) (QQQ) over that period.  However, the stock has surged +84% since mid-May, posting a 7-1/2 month high last month and staging the third-largest rally in the Nasdaq 100 index this year.  The rally in Netflix may have legs if customers gravitate toward the company’s new subscription plans.

The catalyst for the rally in Netflix since mid-May was the company’s introduction of a lower-priced, advertising-supported subscription tier, which may attract new customers at a time when a high level of inflation is eroding the disposable income of consumers. The CEO of EQM Indexes said, “Netflix’s ad-supported pricing tier option of $6.99 a month seems well timed as customers are looking for ways to cut costs.”

Netflix started losing subscribers this year after the company had added millions of paying users during the pandemic-induced lockdowns of 2020 and 2021.  After two disappointing earnings reports this year, Netflix pledged to take drastic steps to turn its business around, which led to the company cracking down on password sharing and launching a cheaper subscription plan with ads.

Over the past decade, Netflix traded at an average of about 79 times forward earnings as its subscription base soared.  However, the plunge in the stock from its record high in November 2021 has lowered its valuation to 27 times forward earnings.  In November 2021, Netflix hit a record market value of $306 billion. Despite the rally in the second half of this year, the stock is still down -49% for the year and is valued at $136 billion.

The turnaround in Netflix has caught the attention of analysts.  According to Bloomberg data, the stock now has 22 buy recommendations, 24 holds, and 4 sells.  That is up from 16 buys, 29 holds, and 7 sells as of June 30.

Evercore ISI, who upgraded Netflix to outperform in September, remains upbeat on the stock and said the company’s basic subscription plan with ads could generate 10 million new subscribers and $1 billion to $2 billion in additional revenue by 2024.

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