Goldman Sachs said Netflix is executing well on its password-sharing and advertising initiatives.The bank upgraded Netflix stock to “Neutral” from “Sell” and increased its price target to $400.Netflix could grow its revenue by 55% to $49 billion by 2025, according to Goldman. Loading Something is loading.
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The recent password-sharing crackdown at Netflix has gone so well that it convinced one Wall Street bear to upgrade the stock.
Goldman Sachs lifted Netflix to “Neutral” from “Sell” in a Tuesday note and increased its price target to $400 from $230. While that price target still implies potential downside of about 9% from current levels, the bank still expects Netflix’s underlying business to grow considerably over the next two years.
“Our prior Sell recommendation had been based on our view that Netflix would face a series of headwinds from post-pandemic subscriber growth normalization, heightened industry competitive pressure, potential pressure on subscriber gross additions from the consumer spending environment and volatile subscriber performance as it rolled out its password sharing crackdown,” Goldman Sachs analyst Eric Sheridan said.
But that didn’t pan out, with Netflix stock surging 135% since Goldman initiated its “Sell” recommendation on June 10, 2022, far outpacing the S&P 500’s gain of just 12.5% in that span.
What went right was Netflix management’s roll-out of its password-sharing crackdown, which has already nudged millions of consumers to finally start paying for the service. The initiative, combined with Netflix’s launch of a low-cost advertising tier, has led to fewer subscriber losses than Sheridan had anticipated.
“Netflix management has executed its password sharing initiative in excess of our prior assumptions, has regained content creation momentum in a manner that has muted any post-pandemic growth headwinds and overall industry competition has become more muted in the past six months,” he said.
That dynamic led Sheridan to estimate that if Netflix continues to execute well, the company can grow its revenue by 55% to about $49 billion in 2025, as well as grow its 2025 GAAP earnings per share to the $22-$27 range. Netflix earned about $10 per share in 2022.
This upside scenario is driven by the assumption that Netflix can convert 70 million of its estimated 100 million password sharers to pay for its service, either by adding another household to an account for $8 per month, or via its lower-cost, ad-based subscription. Additionally, Goldman expects Netflix to grow its core subscriber base by about 2%.
Despite the rosy forecast, Sheridan said there is still too little visibility into Netflix’s underlying business, earning it a current “Neutral” rating rather than a “Buy” rating from Goldman.
“Our Neutral rating reflects our continued low visibility into the pathway to that upside node, but we do acknowledge that a probability weighted outcome toward such a result makes it unlikely the shares would underperform for any extended period in the coming quarters,” he explained.
Disclosure: Mathias Döpfner, CEO of Business Insider’s parent company, Axel Springer, is a Netflix board member.