Video-streaming giant, Netflix (NASDAQ:NFLX) is showing strength at a time when other growth-oriented stocks are faltering. This unusual move comes after months of under performance, prompted by slowing subscriber growth after the earlier pandemic-driven surge.
The Los Gatos, California-based streaming giant has seen its stock surge 15% in the past three months while the tech-heavy NASDAQ 100 Index remained flat. The shares closed on Friday at $613.15, after hitting a record high on Thursday.
Behind this powerful upside move is changing investor sentiment on the stock as it's clear Netflix continues to be the leading producer of new shows and movies, even as the production environment remains challenging with the Delta variant of COVID-19 continuing to spread.
Recent gains in the stock come after the release of an array of popular titles, including new seasons of The Witcher, the South Korean hit series, Squid Game as well as the addition of Seinfeld to the streaming service.
YipitData, cited by a Bloomberg report, estimated that global Netflix downloads have reached their highest levels of 2021, driven by the Asia-Pacific region in particular.
In July, Netflix shocked analysts and investors by forecasting it would add just 3.5 million subscribers in the third quarter, after a year of robust activity that pushed the company's total subscribers to 209 million.
Analysts Are Bullish
A strong content slate is vital to fuel subscriber growth, and there are strong indications that the company is succeeding on that crucial front. Last week, Netflix held its first-ever Global Fan Event with a sneak peek of its upcoming films and TV shows.
Netflix announced on Sept. 22 that it has agreed to buy the Roald Dahl Story Co., adding popular children’s material like Charlie and the Chocolate Factory and Matilda to its content offering. By acquiring the U.K.-based company, which controls the rights to the author’s stories and characters like Fantastic Mr. Fox, The Twits and The BFG, it aims to produce animated and live-action films and TV shows. Netflix said it could produce games, live theater and consumer products based on Dahl’s creations.
After these announcements, many analysts reiterated their bullish call for Netflix stock, saying in a more normal operating environment, the company has a massive lead which could keep its stock elevated.
Evercore ISI reiterated its “outperform” rating on Netflix last week with a price target of $695, which suggests an upside potential of 13% from the stock's current level.
Its note added:
“We reiterate our Outperform rating and $695 PT on Netflix in the wake of takeaways from Co-CEO Ted Sarandos’ new disclosures at the Code Conference and from the company’s very recent Tudum event, which featured new key details on the company’s impressively strong upcoming content slate.”
Another positive development that long-term investors should take into account is that Netflix is no longer dependent on debt to fuel its growth. After years of borrowing to fund production, Netflix has said it no longer needs to raise outside financing to support day-to-day operations. The company plans to reduce debt and will buy back up to $5 billion of shares.
Scott Devitt of Stifel Nicolaus raised his price target to $650 from $580 in a recent note saying that Netflix’s global reach will help expand its total addressable market overseas.
Netflix is “nearing a period of sustained free cash flow generation, which should enable a long runway of self-funded content creation, reduce the need for external financing, and allow the company to return capital to shareholders,” he said in a note cited by CNBC.com.
Bottom Line
Netflix has emerged much stronger from the unique environment of the past year, solidifying its cash and the market position. These factors, including its superior content slate, will continue to keep its stock supported.