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Why one Netflix bear changed his outlook, now sees 40% upside: 'It's undervalued'

·Senior Reporter
·5 min read
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Despite a drop in subscribers and a struggling stock price, Netflix (NFLX) is still on track for a strong rebound — at least according to one analyst.

Michael Pachter, equity research analyst at Wedbush, doubled down on the streaming giant during an interview with Yahoo Finance Live. Previously bearish on the stock, Pachter has since changed his outlook, noting 40% upside potential on the share price.

"The stock was overvalued," the analyst said bluntly, citing its November 2021 peak of $690 a share. "But it's undervalued in the $180s."

On Monday, Wedbush upgraded Netflix from Neutral to Outperform, reiterating its price target of $280 a share. The big bank wrote that the streaming company "is positioned to grow," citing the staggered releases of "Ozark" and "Stranger Things."

"There's a point where 220 million subscribers represents real value," Pachter explained.

"This is not a dumb management team. They're very smart, they have a ton of content, and they've made tens of billions of dollars of investment in content," he continued.

Netflix's unexpected decline in Q1 subscribers led to a stock plummet of 35% and wiped more than $50 billion off its market cap.

Since then, the stock has struggled to rebound — down more than 68% year-to-date as investors question the longevity of the Netflix business model amid high inflation and increased competition.

"I think the Street thinks they're going to zero [subscribers] — they are not," Pachter stated.

He emphasized that Netflix is "going to always be the anchor subscription" as consumers continue to cut the cord; however, the platform will have to reduce churn and stabilize its content spend moving forward.

On Tuesday, Netflix confirmed to Yahoo Finance that it will be laying off about 150 positions of the streamer’s 11,000 workforce in an effort to reduce spending and offset slowing revenue growth.

"As we explained on earnings, our slowing revenue growth means we are also having to slow our cost growth as a company. So sadly, we are letting around 150 employees go today, mostly US-based," a Netflix spokesperson said in a statement.

"These changes are primarily driven by business needs rather than individual performance, which makes them especially tough as none of us want to say goodbye to such great colleagues. We’re working hard to support them through this very difficult transition."

Coupled with layoffs, Netflix's upcoming ad-supported offering, in addition to its crackdown on password sharing, should also help alleviate monetary pressures, with "great potential to drive significant revenue," according to Wedbush.

The bank estimates that an ad-supported model could generate as much as $10 per month per subscriber in ad revenues.

"On balance, we think ad-supported subscriptions is a good idea, particularly as a disincentive to churn," the note read.

Netflix is the 'Taco Bell, McDonald's & Walmart' of video

Wedbush now bullish on Netflix
Wedbush now bullish on Netflix

As competition in the space intensifies, Patcher said it's important to remember Netflix's identity within the streaming wars.

"Netflix is the Taco Bell or McDonald's of video [whereas] HBO is the Ruth's Chris or Morton's SteakHouse," Patcher explained, adding that people expect the content on Netflix to "fill their time" as opposed to a service like HBO (WBD) where folks expect to get "knocked out by a handful of great shows."

"Netflix consumption is something north of 30 hours a month," the analyst noted, adding that "quantity is important."

"Nobody goes into Walmart expecting to buy premium brands and spend a ton of money. They go in for quantity. That's what Netflix is. They're the Walmart of streaming video, and they've got everything," the analyst said.

Still, Netflix's binge-able streaming model, although a big competitive advantage, has led to an increase in subscriber turnover.

According to Wedbush, Netflix lost 636,000 customers in the U.S. and Canada following a roughly 10% price increase. That reflects a "miss" of around 750,000 subscribers (compared to the consensus forecast for a gain of 150,000.)

"In our view, Netflix’s losses are primarily a result of its deep saturation in [the U.S. and Canada], with other options being more attractive to new subscribers once it decided to raise price," Wedbush said.

However, new content rollouts could underscore the platform's "commitment to reducing churn," thus increasing subscriber growth and investor confidence.

Wedbush applauded that company for taking "baby steps" to limit churn by splitting the seasons for both "Ozark" and "Stranger Things."

"In our view, this experiment will be a resounding success if expanded to all Netflix originals, and we believe the company will ultimately move in that direction."

Overall, Wedbush describes Netflix as an "immensely profitable, slow-growth company." The bank suggested that it should raise prices in its more mature markets (U.S, Canada) in order to increase profitability to reinvest in newer markets like Latin America and Asia.

Potential headwinds could include management woes with co-CEO Reed Hastings' track record of being "slow to accept change." Wedbush also said it's "skeptical" of the company's foray into video games, describing it as a "half-baked idea."

Editor's Note: This article has been updated to include the latest news of layoffs at Netflix

Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 or email her at alexandra.canal@yahoofinance.com

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