Shares of streaming giant Netflix (NASDAQ: NFLX) increased by over 9% on September 28 on the back of an analyst upgrade and the news of another hit on the platform.
An analyst from Atlantic Equities, Hamilton Faber, upgraded NFLX stock to “overweight” from “neutral” and raised the price target to $283, up from $211. Netflix stock closed trading at $245.20 yesterday.
According to Faber, the company’s ad-supported tier would be extremely beneficial for Netflix, and the same has not been reflected accurately in its stock price. Faber expects Netflix’s advertising ARPU (average revenue per user) could rise to $26 per month, three times the rate of Hulu.
After accounting for the migration of subscribers towards lower-tier plans, Netflix’s incremental sales might rise by almost $7 billion in the next three years.
Netflix also claimed that Monster: The Jeffrey Dahmer Story has already accrued 196 million hours in its first week and is the biggest hit since Stranger Things 4, which accrued 301 million hours.
Netflix stock price is down 65% from all-time highs
Netflix is among the worst-performing stocks on the S&P 500 in 2022 and is currently trading almost 65% down from all-time highs. While the pandemic acted as a tailwind for Netflix, the reopening of economies, geopolitical tensions, and rising competition have all resulted in a deceleration in top-line growth for the company.
Netflix increased its sales from $20.16 billion in 2019 to $29.7 billion in 2021. Analysts tracking the stock expect sales to grow by just 6.7% to $31.7 billion in 2022 and by 7.9% to $34.2 billion in 2023.
Comparatively, its earnings per share are forecast to narrow to $10.09 per share in 2022 from $11.24 per share in the year-ago period.
In order to offset its slowing growth, Netflix aims to leverage its lower-cost ad-supported tier in several countries, including the U.S., the U.K., Canada, France, and Germany. The new tier will launch on November 1 and should be a key driver of revenue growth for the company in the future.
Is NFLX stock price undervalued?
Netflix recently reported two consecutive quarters of subscriber losses for the first ever in 2022. In Q2, its revenue grew by 18% year over year, and continued a four-quarter slide for the streaming heavyweight. It ended the June quarter with 220.67 million subscribers, a decline of 970,000 compared to the previous quarter.
But Netflix expects to increase its subscriber growth in Q3. Its management forecasts to widen the subscriber base by one million, lower than the 4.4 million users it added in Q3 of 2021. Further, its ads-supported tier could attract as many as 40 million subscribers by the end of 2023.
Netflix stock has surged 36.5% in the last year, and it might gain momentum further if it continues to expand its subscriber base.
Netflix’s engagement rates are poised to move higher due to the global shift towards streaming.
For example, in August, streaming accounted for 35% of the television viewing time in the United States, compared to cable’s 34.5%. This trend is likely to gain pace all over the world, making Netflix an enticing long-term bet.
The final takeaway
Netflix stock is valued at 3.3x forward sales and 24.5x forward earnings, which is quite reasonable for a growth stock. If you are bullish on the long-term prospects of streaming stocks, Netflix should be on top of your shopping list.