On Friday, Benchmark analyst Matthew Harrigan increased the price target on Netflix stock (NASDAQ:NFLX) to $720 from the prior $555, while maintaining a Sell rating on the company's shares. Harrigan acknowledged Netflix's superior execution compared to other media companies and its significant global scaling advantages. However, he believes the stock is overpriced in the current momentum market.
Netflix's future revenue and profitability are expected to hinge on pricing strategies and new ventures such as advertising-supported video on demand (AVOD). The company's growth in paid sharing is anticipated to slow down, which could affect its top-line growth. Despite regretting not upgrading Netflix to a Buy rating in early 2023 after a negative stance during its 2022 decline, Benchmark maintains its Sell rating due to broader market dynamics.
Benchmark's analysis suggests that consumer preferences and profit models will shift towards a unified global television spending total addressable market (TAM) for both connected TV and linear advertising as well as subscription. The updated price target is based on an AVOD model influenced by new global connected TV advertising estimates from GroupM and others.
The firm's projections include Netflix reaching 490 million members by 2033 with an approximately 37% operating profit margin. The valuation also employs an eight-year discounted cash flow method that assumes a normalized 37x price-to-earnings (P/E) ratio for the index in estimating the cost of equity. This is notably higher than the median Nasdaq 100 multiple around 23.5x, suggesting that Netflix could be at risk in any tech-heavy index sell-off.
In conclusion, while recognizing the substantial global TAMs for TV subscription and high-growth connected TV advertising revenues, Benchmark posits that the overall subscription and advertising markets are quite mature, especially when compared to the AI-driven companies that are propelling the Nasdaq 100.
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