Netflix Optimism Fuels Recent Rally

Shares of Netflix (NFLX) have nearly doubled from last May’s 5-1/2 year low, and some analysts are counting on signs of stronger subscriber growth to extend its rally.  The company’s implementation of a cheaper ad-supported tier has boosted subscribers, and Thursday’s report on Q4 results may show that that trend is continuing.

Last year, Netflix reported back-to-back earnings disappointments in the first half of the year that raised concerns about its post-pandemic growth prospects and sent the stock plummeting to a 5-1/2 year low.  However, optimism that the worst was behind it fueled a rally in Netflix from that low. Still, Netflix ended 2022 down -51%, its worst annual performance in more than ten years. 

This year, Netflix is up +11%, almost twice the +5.6% return of the Nasdaq 100 Index ($IUXX) (QQQ).  In Q3, Netflix reported that it added 2.41 million customers, and analysts predict the company will add 4.5 million customers in Q4.  Huntington Private Bank said shares of Netflix don’t fully reflect the power of the ad business, so “if the company shows a little more spending discipline and interest in profitability, it will suddenly look even more attractive.”

However, some analysts remain wary of the future earnings prospects of Netflix.  Fewer than half the analysts tracked by Bloomberg who cover the stock recommend buying it, a far lower percentage than other mega-cap technology and internet stocks.  Also, the average analyst price target for Netflix implies a -2.5% drop from current levels, among the worst expected returns for Nasdaq 100 stocks.  Laffler Tengler Investments said, “there is too much volatility, too many unknowns, and too much that’s out of Netflix’s control.”

The current valuation of Netflix is favorable, which is an underlying positive factor for the stock. Netflix trades at 29 times estimated earnings, less than half of its 10-year average.  It is also trading at a discount to its long-term history in terms of future sales.  According to Bloomberg Intelligence, consensus expectations for 2023 revenue and adjusted earnings at Netflix have barely moved over the past three months, even as expectations have fallen for similar stocks.  Thursday’s quarterly earnings report from Netflix will determine whether any improvement in the business will be enough to justify further upside in the stock. 

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