Netflix shares may be getting through streaming storm

Ahead of next week's third-quarter earnings report, there are signs Netflix’s crackdown on password sharing is supporting user growth in the US, according to market researcher.

Netflix may no longer be the market darling it was in its heyday, but there is increasing optimism surrounding the stock as earnings loom into view.

The shares have taken investors on a wild ride over the past few years, and Netflix’s potential has been more disputed than other major technology and internet companies. 

However, recent initiatives — including in advertising and an account sharing crackdown — are expected to bear fruit, while its competitive position looks strong relative to other streaming-video companies.

“The future of Netflix is one of more durable and steady growth, and the company has put forth a very credible strategy to get there, with a lot of levers it can pull to achieve that,” said Chris Mack, global equity portfolio manager at Harding Loevner. 

“The stock has a unique value proposition from here, especially relative to other media companies. It has withstood a tough competitive environment, and it looks especially strong now that everyone is looking for profitability,” he said. 

Ahead of next week's third-quarter earnings report, there are signs Netflix’s crackdown on password sharing is supporting user growth in the US, according to the market researcher Antenna, even as Walt Disney is reportedly struggling with streaming subscribers. 

The Wall Street Journal reported Netflix plans to raise prices after the Hollywood strikes have been resolved, a potential sign of its pricing power.

Analysts have been warming up to Netflix, following a washout of sentiment that followed a pair of post-pandemic earnings blowups. The stock’s consensus rating — a proxy for its ratio of buy, hold, and sell ratings — is at the highest in more than a year.

For bulls, Netflix’s attraction can also be found in its current discount to the high price tag it has been known for. It trades at 25 times estimated earnings, a fraction of its 10-year average above 75, and close to the Nasdaq 100’s multiple of 23 times. 

The average analyst price target points to more than 25% upside from current levels — similar to the trajectory expected for Disney stock. Netflix shares are up about 27% this year, trailing the rise of the Nasdaq 100.

Volatility

While Netflix used to be casually grouped with such stocks, its volatility reflects the difficulty investors have had in determining its prospects.

“Growth issues have kept Netflix from being among the Magnificent Seven,” said Mr Mack, referring to a group of high-flying tech leaders. “It will take time for the doubters to come along with the story, but we’re willing to be patient.” 

Earnings have lately been a negative catalyst, with the stock dropping after seven of the past 10 most recent reports. Last quarter’s results, which featured a disappointing outlook, triggered its biggest drop of 2023.

On the downside, chief financial officer Spencer Neumann recently said the company was not expecting dramatic growth in average revenue per member this year, while its advertising initiative is “not that material yet”. 

Those comments, along with US yields hitting multi-year highs, have contributed to sharp underperformance in Netflix over the past month.

Such uncertainty was articulated by Bernstein’s Laurent Yoon, who began coverage on the stock with a market-perform rating earlier this month. 

While noting Netflix was “easily the best streamer” and that ads and the password crackdown represent opportunities, “expectations are likely ahead of the reality", he wrote. 

• Bloomberg