Analysts are increasingly optimistic that Netflix's move into advertising will help improve the company's stock performance in 2022. This is a positive development for a company that has struggled in recent years.
At least three firms on Wall Street have upgraded the streaming-video company’s shares this month, citing its planned introduction this year of an ad-supported subscriber tier. This new tier is seen as a positive move by the firms, as it is expected to attract more users and generate more revenue.
Netflix shares have plummeted 60% in 2022, making it the fourth-worst performer in the Nasdaq 100 Index. The company's stock fell 0.4% on Tuesday following a pair of catastrophic earnings reports, including the first quarter since 2011 in which its user base shrank.
The results of Netflix's recent price hike have raised questions about its ability to maintain its pandemic-era gains. The cheaper ad-supported tier could help address this issue. According to The Wall Street Journal, Netflix projects that the ad-supported offering will reach about 40 million viewers by the third quarter of 2023.
According to David Klink, senior equity analyst at Huntington Private Bank, Netflix has already taken the necessary steps to ensure success in the future. He cites the company's ability to identify and execute on catalysts as a key strength that will help them continue to grow.
Netflix has long resisted introducing ads to its service, preferring instead to count on must-watch content like “Squid Game” and “Stranger Things” to attract paying subscribers. However, with consumers’ finances getting pinched by rising inflation, the company reported a massive customer loss this year. An ad-supported offering with a lower monthly cost could provide a new revenue stream and attract a wider user base.
Klink believes that even though ads may not be a perfect solution for the company's problems, the stock is still more appealing because it has both value and growth potential.
It may seem strange to think of Netflix as a value stock, but in today's uncertain economic climate, a lot of portfolios could benefit from having a stock like this that can both offensive and defensive.
Oppenheimer is the latest firm to take a more positive view on the ad tier, writing that it should accelerate subscriber growth. Evercore and Macquarie have also adopted more bullish stances, with Evercore calling the ad offering a clear catalyst that can drive a material re-acceleration in revenue growth.
The majority of analysts are still taking a cautious approach with Netflix. Fewer than a third recommend buying the stock, while more than half have the equivalent of a hold rating. At the start of the year, more than 70% of analysts tracked by Bloomberg had a bullish rating on the stock.
Despite some recent optimism, the stock market has been struggling overall. Since June 16, the Nasdaq 100 index is up by only 6.5%. However, Netflix has seen a much more significant increase of 39%. This is likely due to the upgrade that Evercore gave the streamer last week.
Netflix's valuation is much lower than it has been in the past, trading at just 22 times estimated earnings. This is well below the 10-year average of 80 and the Nasdaq 100's 20.6. This low valuation indicates that there is still room for growth for Netflix.
Denny Fish, who manages the $4.4 billion Janus Henderson Global Technology and Innovation Fund, said Netflix’s valuation and prospects make it more attractive than other fallen market favorites like Facebook parent Meta Platforms Inc. Fish said that Netflix’s strong brand, global reach, and growing subscriber base make it a more attractive investment than other companies that have seen their stock prices drop in recent months.
According to the article, growth has slowed and there is more competition, but the author suggests that this might be a more comfortable situation over the long term.
The recent decline in tech stock prices has reduced the valuation of the Nasdaq 100 Index, bringing its price-to-earnings ratio in line with the benchmark's 10-year average. While investors may be tempted to buy back into the sector, they may remain cautious until the Federal Reserve's rate decision on Wednesday.
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