A onetime Netflix bear has turned bullish on the stock, pointing to various levers beyond a password-sharing crackdown that could help the beaten-down streaming giant improve its positioning.
Wedbush analyst Michael Pachter upgraded Netflix NFLX, +2.61% shares to outperform from neutral Monday, arguing that the company is set up well to beat its second-quarter guidance and has several levers to pull as it looks to improve churn metrics.
“We do not believe that Netflix’s share price will approach 2021 levels for many years, but think that our price target of $280 is achievable within the next 12 months,” Pachter wrote in his note to clients. Pachter’s newfound bullish view on Netflix is especially notable because he had been bearish on the stock for years before moving to neutral in March.
Netflix shares were up 1.1% in Monday morning trading. Pachter’s price target implies about 48% upside from current levels.
The streaming-media company revealed on its last earnings call that it planned to target password sharing, something it believed was a rampant trend impacting subscriber growth. Pachter wrote Monday that Netflix is “unlikely to win more than a few million new customers by changing its practice” on passwords, but he seemed more upbeat about other initiatives, such as the exploration of an advertising-supported tier.
“On balance, we think ad-supported subscriptions is a good idea, particularly as a disincentive to churn,” Pachter wrote, noting that such a move could “drive significant revenue,” even if it has the potential to cannibalize existing Netflix users, some of whom might trade down to the lower-priced ad tier.
Pachter is also intrigued by the possibility that Netflix will change its approach to content releases and opt for more staggered debuts. The company split up new seasons of “Ozark” and “Stranger Things,” and Pachter sees promise in that strategy because it can help Netflix minimize subscriber churn.
“In our view, this experiment will be a resounding success if expanded to all Netflix originals, and we believe the company will ultimately move in that direction,” he wrote. Staggered releases could drive an “uptick in subscribers” and improve confidence in the Netflix business model, in his view.
“We think that binge watching, while a huge competitive advantage as Netflix built its nearly insurmountable competitive subscriber advantage, has become a lodestone around the company’s neck, allowing subscribers to easily churn in and out of the service as desired,” he wrote. “Netflix customers need a constant stream of new and interesting content to keep them engaged, while HBOMax subscribers need only a handful of series each year to keep them engaged for the majority of the year.”
Overall, Pachter sees Netflix as an “immensely profitable, slow-growth company,” and he thinks the company should embrace its identity.
“If Netflix were to acknowledge that its growth has stalled in UCAN [the U.S. and Canada] and that it is heading toward full market saturation in EMEA [Europe, the Middle East, and Africa], it could trade off growth in those regions for profits, and could raise prices,” he wrote. By “harvesting mature markets,” the company could use its “likely immense profits” to fuel overseas growth in regions such as Asia and Latin America, he noted.
The stock has tumbled 61.5% over the past 12 months, while the S&P 500 index SPX, -0.26% has slipped 4.4%.