Goldman's Eric Sheridan was the most bearish analyst on Netflix, but is now in the middle of the pack
Shares of Netflix Inc. spiked up to a 17-month high before paring gains, after the most bearish analyst had a change of heart, as the streaming video giant's management has executed the crackdown on password sharing better than expected.
Analyst Eric Sheridan at Goldman Sachs raised his rating on Netflix's stock $(NFLX)$ to neutral, after being at sell for the past 13 months. He also boosted his price target by 74%, to $400 from $230.
Sheridan's previous price target was the lowest among the 44 analysts surveyed by FactSet who cover Netflix. The top bear is now Benchmark's Matthew Harrigan, who had a sell rating and a $250 price target on the stock, according to FactSet.
Based on an analysis of potential operating performance, as the company executes its password and ad-tier initiatives, Sheridan decided it was better to no longer recommend selling into Netflix's reporting of second-quarter results, which is slated for July 19.
The stock rose as much as 2.2% to an intraday high of $450.97, which was the highest price seen during regular-session hours since Feb. 2, 2022, before paring gains to be closed up 1,01% on Wednesday.
Sheridan said his prior bearish stance was based on concerns that the company would face a series of headwinds, including the normalization of post-pandemic subscriber growth, increased competition, a decline in consumer spending as the economy slows and a "volatile" subscriber environment as the company cracked down on password sharing.
"In short, [Netflix management] has executed its password-sharing initiatives in excess of our prior assumptions, has regained content creation momentum in a manner that has muted any post-pandemic growth headwinds and overall industry competition has become more muted (especially from traditional media companies) in the past six months," Sheridan wrote in a note to clients.
He wrote that he now expects Netflix to beat Wall Street expectations for subscriber additions, and sees the company reporting higher revenue per existing member.
The current FactSet consensus for second-quarter subscribers is 234,388, which is up from 220,670 a year ago. The FactSet consensus for average revenue per user (ARPU) is $11.76, down from $11.96 a year ago.
With Sheridan's upgrade, only two of the 44 analysts surveyed by FactSet are bearish, while 22 are bullish and 20 are neutral.
The average stock price target is $404.43, which implies 8.8% downside from current levels.
The stock has soared 50.4% year to date, while the Communication Services Select Sector SPDR exchange-traded fund $(XLC)$ has climbed 37.5% and the S&P 500 index has advanced 15.9%.