By Mackenzie Tatananni
Netflix stock may be entering "the valuation danger zone," but analysts at KeyBanc reiterated their bullish position and opted to raise their price target on the shares.
Shares of Netflix have advanced 0.4% to $914.04 in early trading Tuesday after analysts led by Justin Patterson maintained an Overweight rating while increasing their price target to $1000 from $785. The new price target is 9.4% above current levels.
It wasn't all good news for investors, though, as the analysts increased target came with a two-part warning. The first is on the narrative, which has Netflix as the big winner of the cable-streaming TV wars. The second is valuation. The firm noted that Netflix shares are trading at nine times enterprise value to sales, which has historically signaled that the streamer is nearing a peak valuation.
"Right now, we believe we are in a regime where the consensus view is 'Netflix has won' and 'legacy media is challenged,'" the analysts wrote. "Historically speaking, this combination of valuation and narrative creates elevated risk for investors."
And yet they raised their price target and maintained their rating on the stock. "While this suggests investors may have priced-in recent momentum, we see several reasons to believe NFLX can outperform the S&P 500 into 2025," the analysts asserted.
For starters, there is evidence of "a shift in Netflix's business." The company announced in an April letter to shareholders that it would no longer report quarterly paid members or average revenue per member, signaling a move "away from quarterly net adds and more toward total revenue growth," in KeyBanc's view.
That shift began when Netflix started cracking down on password sharing in 2023, triggering a drop in viewership gains. However, the streamer has mostly rolled out a paid sharing model where account holders pay an additional fee for extra members outside their household, and KeyBanc believes these metrics will improve in 2025.
As viewership grows, so do opportunities for monetization, the analysts wrote. Netflix's "strongest content slate ever" kicks off this week, with NFL and Squid Game 2 preceding the return of several major Netflix originals.
Some of the most meaningful growth drivers are outside the company's control, KeyBanc argued, as industry-wide factors could serve to benefit the streaming service. Looking at peers Peacock, Disney, Warner Bros. Discovery, and Paramount, "live streaming has shifted to Netflix," the analysts wrote, noting that Netflix accounts for 50% of direct-to-consumer video revenue and "virtually all of industry profitability."
Nor is Netflix content just to produce movie and shows now. It edged further into live programming in 2024, marking a pivot from its vast library of scripted content. KeyBanc singled out two examples: the comedy special The Roast of Tom Brady and the Jake Paul-Mike Tyson boxing match, with the latter capturing the attention of 60 million households in real time.
Although the live broadcast faced buffering and lag issues, the event drove massive viewer interest and signaled Netflix's fresh ambitions to disrupt the media landscape.
Netflix even acknowledged the hype in a social media post, writing that the event "dominated social media, shattered records, and even had our buffering systems on the ropes."
And the streamer has more live programming on its slate. Christmas-Day NFL games are the next major event, followed by the debut of weekly WWE programming on Jan. 6 -- all signs that Netflix has solidly turned toward live events, KeyBanc argued.
"While we do not believe these events will have the same impact on net adds as the Paul vs. Tyson fight (we suspect there was some pull-forward during the quarter), we do believe these live events are turning into important drivers of engagement," the analysts wrote.
KeyBanc said it is confident in the company's "clear growth algorithm" and anticipate transition from membership growth to monetization growth by the end of 2026.
None of this takes into account Netflix's advertising business, with revenue characterized "more as a 2026 and beyond driver," suggesting Netflix could accelerate growth rates in the future.
The company also has yet to meaningfully raise prices across markets and plan types, KeyBanc noted. The last major price hike came in January 2022. "This suggests Netflix can still pull this lever if management chooses to," the analysts asserted. "With more live events coming, we believe the probability of price increases is increasing."
Yes, the narrative is too rosy. Yes, the valuation is high. But KeyBanc ultimately decided that the potential for upside outweighed the risks.
We'll see how it works out for them.
Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.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
December 24, 2024 10:50 ET (15:50 GMT)
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