If Netflix (NASDAQ:NFLX) can surprise Wall Street with its upcoming earnings report, we could be on for the mother of all comeback rallies. For context, their shares were decimated back in January after what can only be called a horrendous report. Even though the streaming giant’s stock had been on the back foot since December and was down 30% from its all-time high coming into the release, that didn’t stop investors from sending it down the same distance again in the days afterward.
Even though their revenues for the quarter were in line with analyst expectations and EPS was ahead of the consensus, the primary cause of concern was the slowdown in subscriber growth. Coupled with the tightening interest rate cycle being initiated by the Fed, you had two fairly good reasons to dump Netflix shares as an investor.
But since bottoming out last month, having shed a complete 50% of their value from last year’s high, they’ve tacked on as much as 20%, not an unnoticeable gain by any stretch of the imagination. Could investors be starting to think the recent selloff is overdone and this month’s release will deliver an upside surprise? If so, they’re not alone in doing so.
Bullish Comments
Since January’s release, there have been more bullish comments on Netflix shares than bearish ones for the past few months. Analyst firm Benchmark was one of the first to come out on the buy side, calling the post-earnings selloff an overreaction. Having had a Sell rating on the stock, they upped it to Hold because they were still "bullish" on the global direct-to-consumer streaming business. They tempered this by pointing out the new reality of the streaming landscape, where Netflix is now "first among equals rather than a dominant player commanding overwhelming network effects."
Still, they estimated the fair value of Netflix stock to be around $450, a target that has only become more appetizing in the intervening weeks. As of Wednesday’s close, it’s still pointing to an upside of some 20%. Bill Ackman’s Pershing Square fund then threw its cap into the ring, disclosing a 3 million share purchase that suggested the smart money was starting to view the risk-reward profile as quite favorable. To clients, they spoke of Netflix’s "highly favorable" characteristics such as its subscription-based and highly recurring revenues, best-in-class management, high-performance culture, and improving economies of scale.
Next up was Netflix’s co-CEO Reed Hastings, who, with his own money, bought $20 million worth of shares. This was a meaningful vote of confidence for both investors who were holding through the selloff and those on the sidelines considering an entry. It’s not often you see management putting their own money where their mouth is, particularly at that scale.
Citi then upped its rating on Netflix shares while giving them a new price target of $450. Interestingly, this matched Benchmark’s estimate of the stock’s fair value. Citi analyst Jason Bazinet raised his rating while noting that the enterprise value per subscriber analysis "suggests prevailing equity values don't assume material sub growth or improving subscriber economics beyond 2023." He also spoke about how Netflix "has ample pricing power."
Getting Involved
However, despite all these bullish comments and moves, Netflix shares still trickled lower for much of the first quarter. Indeed it could be said their bounce from last month’s low was largely driven by the market-wide rally that saw the tech-heavy NASDAQ jump 17% in just two weeks. Still, a low has been put in, and this will be the main line of defense should shares weaken again in the coming sessions. To the upside, however, investors have the appealing catalyst of the company’s earnings later this month.
If the worst-case scenario has already been priced into Netflix’s shares with the 50% haircut, and if so, will any upside surprise spark a rally? It remains to be seen, but the prevailing sentiment on Wall Street, at least the kind which has been publicized, is that the recent selloff has not been justified.
