Two Netflix Analysts Tout Stock Upside Over Lower Churn, Ad-Tier Outlook

Two Netflix Analysts Tout Stock Upside Over Lower Churn, Ad-Tier Outlook

Netflix earned two bullish analyst notes on Friday, with the streamer’s stock rising in pre-market trading.

In a report entitled “More Ways to Win,” Wells Fargo analyst Steven Cahall upgraded the stock from “equal weight” to “overweight” and boosted his price target from $300 to $400. “Our deep dive into Netflix sees content improving churn, while AVOD and paid sharing improve estimates,” he explained.

The expert touted a “positive catalyst path in 2023, led by lower churn and stable subs” after a tough 2022. “Looking back, with competition increasing and content growth slowing, the pieces were there for tougher Netflix performance in 2022. Looking at the same mosaic, we see scope for the key performance indictators to exceed in 2023, and Netflix is still down by about half year-to-date versus the S&P500 -17 percent.”

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He added: “Content is clearly improving with monthly average users/daily average users up 6 percent/9 percent year-over-year in our latest monthly data scrub as content starts to hit. We think the pull-forward from COVID is now mostly digested, with global connectivity still providing a long-term tailwind of around 8 million net adds annually before any penetration increase.“

Cahall emphasized that “AVOD estimates make us bullish,” sharing his forecasts for the just-launched cheaper ad tier of the streamer.

“Overall, we forecast Netflix’s ad-supported tier will drive around 23 million incremental subs by 2025 to 279 million global subs, versus our prior expectation of 256 million. We don’t see how AVOD isn’t anything other than incremental to subscribers. We expect Netflix to add 55.5 million total subs through ’25, of which 22.5 million, or 40 percent, are expected to come from AVOD.” The Wells Fargo analyst sees Latin America and Asia driving the majority of this growth. 

He also estimated AVOD average revenue per user (ARPU) of around $12 per month in ’23, which he said was “neutral” overall, followed by AVOD becoming around 1 percent ARPU accretive in ’24 and 2-3 percent ARPU accretion by ’25. “This in part reflects strong SVOD ARPU growth on lower churn,” Cahall explained. “We expect the AVOD tier to add (i.e. incremental) revenues of $0.3 billion/$1.6 billion/$3.4 billion for 2023/24/25 based on advertising revenues of $1.5 billion/$4.3 billion/$8.1 billion.”

Meanwhile, Cowen analyst John Blackledge touted Netflix as one his “best ideas for 2023” and his “top large-cap pick.” The rollout of the ad tier “will be key in ’23 and longer-term,” he argued, forecasting that the streamer would end 2023 with 8 million global AVOD members, rising to 43 million by 2028. 

“The key drivers for Netflix’s shares in ’23 are new monetization levers, including the new lower price ad tier (which could drive accelerating net member adds) and the paid sharing solution launching globally in ’23; revenue re-accelerating in the second half of 2023; and free cash flow growth ramping.”

Blackledge raised his long-term forecasts for subscribers, revenue and operating income, reiterating his “outperform” rating on Netflix and boosting his stock price target from $340 to $405, “implying around 30 percent upside from current levels.”

In pre-market trading, Netflix’s stock was up 2.8 percent at $319 as of 9 a.m. ET.