By George Glover
Netflix underlined its streaming dominance on Thursday -- but that doesn't mean investors should pile into the stock.
Analysts are warning that shares look overvalued as the streaming giant pivots to an ad-supported model and tries to stave off competition from rivals like Disney+ and Amazon Prime.
The reactions to Netflix's third-quarter earnings, which it reported after Thursday's closing bell, have largely been positive.
The tech company posted better-than-expected profit, sales, and subscriber numbers, and issued a strong guidance for the current quarter. Its shares jumped 5.8% to $727.32 in Friday's premarket, compared with a 0.2% rise in futures for the S&P 500.
The earnings beat is the latest bit of good news in what's been a blockbuster year for the stock.
Netflix has climbed 41% in 2024 -- the sort of gains you'd expect from a member of the Magnificent Seven. Its biggest rival Walt Disney Co. is up just 7% this year, while Comcast, Warner Bros. Discovery, and Paramount Global are all trading in the red:
But some on Wall Street are warning that the run of gains won't last.
Matthew Dolgin, who covers technology, media, and telecom stocks for Morningstar, said on Friday that investors are putting too much emphasis on the September-quarter earnings beat.
"While we expect Netflix to remain well ahead of competitors, we think the market is extrapolating recent amazing results too far into the future," he wrote on a research note, adding that the streaming service has a narrow competitive moat and will probably have to raise its prices to offset slowing subscriber growth. Dolgin rates the stock as a Hold, and his $550 price target implies it could tumble about 32% from its current levels.
Seaport Research Partners analyst David Joyce, who hasn't set a specific price target but rates Netflix at Neutral, said that Thursday's results underlined the strength of the company's "great business model" -- but is also worried that shares are overvalued after their stellar run this year.
"Management has to continue to execute on the hopes for the advertising opportunity, and scale their gaming, live event content and experiences opportunities," he wrote in a Friday research note.
"We would be buyers in the low- to mid-$600s, but are inclined to let the shares run...we would not necessarily add to positions here," Joyce added.
That seems to fit with the consensus. According to FactSet data, about two-thirds of the 51 analysts who cover Netflix rate it as a Buy -- but their consensus price target of $747 implies the stock is likely to only rise another 3%.
It's a story investors might have to get familiar with. Netflix's latest set of results underline its status as a great company -- a tech disrupter that shook up the entertainment industry and is still pumping out must-see content.
But with so much froth in the market right now, that's not enough to make its shares a great investment.
Write to George Glover at george.glover@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 18, 2024 06:25 ET (10:25 GMT)
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