Netflix Inc (NASDAQ:NFLX) made the “Best Ideas List” of analysts at Wedbush, with the firm arguing that the company can generate “significantly more” free cash flow than even its own guidance suggests.
The firm maintained its Outperform rating and $410 price target. Shares of Netflix were down 1.4% Friday afternoon at $366.20.
“We think Netflix has reached the right formula with its global content to balance costs and generate increasing profitability, while its ad-supported tier and password sharing crackdown should further boost cash generation,” analysts wrote in a note published Friday.
“We think Netflix is well positioned in this murky environment as streamers are shifting strategy, and should be valued as an immensely profitable, slow-growth company.”
Netflix recently launched a cheaper ad tier that currently has 5 million monthly users, or roughly 2% of its total 232.5 million subscribers.
Wedbush believes it will continue to grow.
“Even while ads are not yet directly accretive (we think they will be increasingly accretive over time), the ad tier should continue to reduce churn and draw new subscribers to the service, while the password sharing crackdown may drive [average revenue per user] higher initially with some churn but ultimately expand Netflix’s subscriber base,” analysts wrote.
Notably, Netflix’s US average revenue per user (ARPU) was higher for its ad tier than its standard plan, which led the company to add features similar to the standard plan to drive more subscribers.
That leaves plenty of room for growth, according to the analysts.
“We continue to see significant room for upside as Netflix learns to balance viewership levels with [cost per 1,000 impressions] and ad views per hour,” analysts said. “Netflix should be able to increase Ad ARPU to the $16 range or higher over time.”
“Ad-tier engagement is as high as its regular tiers, underscoring that viewership on its ads plan was just an early growing pain and will not be an ongoing problem,” they added.
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
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