NEW YORK: Fast-growing technology stocks have taken a beating in recent weeks – and Netflix Inc is no exception.
Shares of the streaming giant are down about 11% from a Nov 17 record, in tandem with the slump in the tech-heavy Nasdaq 100 Stock Index after the Federal Reserve indicated three rate increases and faster tapering in 2022.
Concerns over the Omicron coronavirus variant have also pressured equities.
These forces have thrown the broad investment outlook for the start of 2022 into flux, but what hasn’t changed is the bullish view on Netflix shares.
Wall Street’s optimism hinges on the company’s ability to lure new subscribers with best-in-class content, boosting margins and cash flow along the way.
The 12-month average analyst price target comes in at US$683 (RM2,874), which implies an 11% gain from Wednesday’s closing price of US$614.24 (RM2,585).
That’s less than the 27% increase analysts project for streaming rival Walt Disney Co, but it would extend Netflix’s streak of double-digit annual gains.
Netflix shares rose 1.5% on Wednesday.
“Despite market turbulence, we’re still interested in having exposure to tech companies,” said Erica Furfaro, senior portfolio analyst at ClearBridge Investments, which holds Netflix shares.
“Even in a rising rate environment, being invested behind the best growth winners is still a prudent approach.”
Netflix this year defied skeptics who fretted that it might stall as the world began to open up from lockdowns.
After falling in the first half, the stock climbed to fresh highs on the unexpected success of South Korean show Squid Game, which became Netflix’s biggest series launch ever.
Shares had already started to climb in early August, with the stock riding a three-month, 33% rally as Wall Street began to appreciate the slew of shows and movies coming in the third and fourth quarters, including new seasons of Money Heist and Sex Education, said Wells Fargo Securities analyst Steven Cahall.
Cahall is among analysts that expect Netflix’s rally will continue, projecting that the stock will reach US$800 (RM3,366) by the end of 2022.
Popular content, subscriber growth and margin expansion – the longstanding yardsticks for the company – will remain the catalysts for shares, he said.
“All the revenue is based on content,” Cahall said in an interview.
“The content is the majority of their costs. And so their ability to spend on content and generate new content is really what drives these business models.”
For Mark Stoeckle, chief executive officer and senior portfolio manager at Adams Funds, Netflix’s valuation and streaming competition are two factors that are keeping him from turning more bullish on the stock.
The Adams Diversified Equity Fund is modestly overweight Netflix versus the S&P 500 Index after buying shares in September.
Netflix trades around 46.5 times forward earnings.
Although that’s down from a recent peak of nearly 54 times in October, it still tops the Nasdaq 100 at 28.3 times and the S&P 500 Communication Services Index at 19.8 times.
Disney, whose flagship streaming service is widely seen as Netflix’s biggest competitor, has tumbled amid concerns that subscriber growth at Disney+ is slowing and as the variant threatens a return to theme parks.
The stock is heading for its first annual decline since 2016 and its worst year since 2008.
Both Netflix and Disney face competition in 2022 from the direct-to-consumer service that will emerge from the merger of Discovery Inc and AT&T Inc’s WarnerMedia, according to Macquarie analyst Tim Nollen. He has upgraded Discovery to an “outperform” from “neutral” in anticipation of the deal. — Bloomberg
Source: The Star
