Key Points
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Netflix shares hit a a nearly two-year low on Friday following disappointing quarterly results.
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After a wave of disappointing analyst updates, one came through with an upgrade over the weekend.
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With Netflix stock trading for a forward earnings multiple in the high teens, the former growth stock could now be compelling as a value play.
- 10 stocks we like better than Netflix ›
After a year of poorly received financial updates, Netflix (NASDAQ: NFLX) was bound to catch a break eventually. The premium streaming pioneer saw its shares tumble 7% on Friday after following up mixed financial results with uninspiring guidance, with the stock down 46% over the past year, but at least one Wall Street pro sees the markdown as a buying opportunity.
Helena Wang at Phillip Securities upgraded the beleaguered stock over the weekend. The move comes after at least 14 analysts slashed their price targets on Friday and another chimed in with a ratings downgrade. The move is timely for a stock that has shed nearly half of its value since hitting an all-time high last summer. Let’s take a closer look.
Success is relative
Wang’s move is notable for two reasons, after a flurry of pessimistic Wall Street notes heading into the weekend. Wang’s is the lone upgrade so far, bumping her firm’s opinion from “accumulate” to “buy.” The Philip Securities analyst is also sticking to her earlier price target of $110.
With Netflix stock now sliding following its past five quarterly updates since peaking in June of last year, Wang’s upgrade offers a refreshing break from the chart’s reality. Netflix is clearly out of favor, despite its ongoing market dominance — no one else comes to Netflix’s paying audience of more than 300 million homes worldwide. This upgrade won’t turn momentum around overnight, but it still offers encouragement to investors after a brutal year for the industry trailblazer.
NFLX data: YCharts.
Wang’s decision to stick to her earlier target of $110 may not have seemed like much a few months ago, when the shares were higher, but now her unchanged price goal translates into near-term upside of 60% from Friday’s close.
The analyst points out that membership trends remain positive and that members aren’t flinching at the steady diet of rising subscription rates. Newer streaming services are just starting to turn profitable, but Netflix has consistently been in the black since adding a streaming option to its original disc-based platform almost 20 years ago.
Wang believes that engagement remains strong at Netflix and that profitability can accelerate as it expands its ad-supported monetization. The latter contrasts with analysts who were worried about Netflix’s admission during last week’searnings callthat it’s exploring free ad-supported tiers in some countries outside the U.S. market.
Field of streams
Philip Securities isn’t one of the largest firms following Netflix, and the bullish read of the report has been an exception to the rule. However, the upgrade over the weekend is a valuation call in light of the stock’s recent markdown.
Netflix is cheap, historically speaking. It kicks off this week at just 19 times this year’s projected earnings. Analysts may whittle those profit targets lower in the coming days, but you rarely find Netflix at a forward earnings multiple in the teens.
Analysts were already souring on Netflix even before the numbers became official late last week. A couple of Wall Street pros were putting out cautious notes in the days leading up to the big reveal, not an ideal situation for a stock that was already sorely lagging the market.
There are some near-term concerns. Its revenue guidance for the current quarter — just shy of 12% year-over-year growth — would be its weakest showing in three years. With Netflix out of favor, it may feel pressured to strike a dilutive buyout deal with a smaller rival. The stock has to practically double from today’s price to return to the all-time high it reached 13 months ago, but there’s still time for a Hollywood ending for Netflix.
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