Baird boosts Netflix to Buy, seeing strong new revenue programs
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Baird has given Netflix (NASDAQ:NFLX) a post-earnings upgrade to Outperform, seeing improvement in the financial profile after second-quarter earnings and some new confidence in the streamer's latest service initiatives.
The firm likes progress from the key pair of revenue-enhancing moves from the past year: the introduction of an advertising-supported service level and the implementation of paid account sharing, a crackdown on unauthorized sharing of Netflix passwords.
The firm is particularly encouraged by talk that the ad-supported plans are doing better on per-user economics than global Basic ad-free plans worldwide, and Standard plans in the U.S. -- economics that should keep getting better as the company improves its ad infrastructure, analyst Vikram Kesavabhotla said.
Meanwhile, sign-ups are exceeding cancellations in paid sharing regions, Kesavabhotla added. Also, the move to remove the basic ad-free plan in key markets is a "significant validation of recent monetization initiatives," and management has acknowledged that its broader pricing philosophy hasn't changed, leaving room for future price hikes.
The company's headed for a "period of particular strength," with significant revenue acceleration in Q4 and next year; ongoing operating margin expansion considering the high-margin nature of the new streams and scale benefits; "significant and growing" free cash flow in the next few years; and competitive advantages as rivals focus on profitability and dodging content disruptions.
As for an already rich valuation, "we are now more comfortable adopting a constructive stance given: (1) increased confidence in execution, (2) momentum building over the coming quarters/years, (3) a more supportive valuation backdrop across the sector, and (4) our sense that investors will increasingly gravitate to NFLX given its scarcity value as a pure-play streaming asset with secular tailwinds, scale, profitability, and a proven track record," Kesavabhotla said.
Baird has boosted 2023 EPS to $12.00/share from $11.24/share, and 2024 EPS to $15.77 from $14.29. The firm has raised its price target on Netflix stock (NFLX) to $500 from $340, now implying 18% upside.

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