Analysts at Wedbush have reiterated their ‘Outperform’ rating and upped their price target for Netflix following the streaming giant’s second quarter results, despite investor disappointment over the report sending the stock almost 9% lower.
The analysts raised their price target from $475 to $525, reflecting a price-to-earnings multiple of 30 times their 2025 earnings per share (EPS) estimate and 29 times their 2032 free cash flow estimate of $12 billion, discounted at the 10-year treasury rate.
Netflix shares had tumbled by 8.9% to US$434.92 on Thursday morning.
The analysts wrote in a note to clients that it was their view that Netflix can generate significantly more free cash flow than its guidance suggests.
“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,” they wrote.
“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.”
They noted that their positive thesis on the stock relies in part on the password sharing crackdown both driving subscribers higher and driving average revenue per user higher, the latter of which should begin in the second half of 2023.
On the company’s 2Q results, the analysts wrote that Netflix’s crackdown on password sharing and ad-supported membership tier had only begun to positively impact its results.
“One of the most important takeaways from 2Q results is that Netflix remains laser-focused on increasing profitability and free cash flow,” they wrote.
“Netflix reached its prior 2023 free cash flow guidance of $3.5 billion in 1H 2023 alone, and raised its 2023 guidance to $5 billion-plus.”
They said the 2Q results showed that former subscription piggybackers were signing up for their own accounts post-sharing crackdown, with many opting for the ad-based subscription tier.
The ad tier continues to reduce churn and its average revenue per user is still lower than the average revenue per user per region, they noted.
“We suspect that the ad tier will reach parity in 3Q at least in the U.S. as it is currently tracking above the standard plan in the U.S.,” they wrote.
“We think the inflection point on the ad tier will come by year-end, where additional subscribers on the ad tier will drive regional average revenue per user higher.”
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