Wall Street Sees $500 in Netflix's Coming Attractions

In what's shaping up to be a comeback thriller, Netflix NASDAQ: NFLX may be headed to $500 per share. 

This week, three Wall Street research firms have raised their price targets on the streaming TV leader, helping its stock climb to its highest level since February 2022. One is Guggenheim, which raised its target to $500, a whopping $125 increase. Last week, two other firms predicted Netflix will top $500 over the next 12 months.

The Street's catch-up game is the latest plot twist in an impressive turnaround story for Netflix. Last year, the stock sunk as low as $162.71, erasing five years of gains. The downturn was attributed to subscription losses, password sharing, and intense competition.  

However, over the past 12 months, Netflix's optics have improved dramatically. Subscription figures look better with consumers embracing a new ad-supported tier and paid sharing. 

After announcing an $8.00 fee for non-household users on May 23rd, Netflix had its four best sign-up days in four and a half years, according to data from Antenna. This is just one of the ways Netflix is gradually reasserting its dominance. 

What Is Driving Netflix's Recovery?

Netflix benefitted from a demand pull-forward effect during the pandemic. As economic conditions normalized and Disney+, Paramount+ and others crowded the market, Netflix sales growth slowed. 

After two years of slowing growth, that trend finally reversed in the first quarter of this year. On April 18th, Netflix posted 4% year-over-year top-line growth, accelerating from 2% in the fourth quarter. After losing 200,000 subscribers in the prior year period, 1.75 million paid subscribers were added in Q1 of 2023. Along with optimism around new monetization initiatives, the solid start for the year has extended a Netflix stock recovery one year in the making.

Early success with its account-sharing crackdown certainly bodes well for further momentum in the recovery. If Netflix can keep acquiring new subscribers and rake in freeloader fees, market share gains and better financial results should follow.

Why Can Netflix Stock Go Higher?

The Netflix recovery plot may thicken in the year's back half when the company faces easy year-over-year comparisons. Wall Street is anticipating negative earnings per share (EPS) growth for Q2 but a return to EPS growth in Q3. When Q4 earnings season rolls around, Netflix will be up against its paltry $0.12 EPS tally from Q4 of 2022. This year's consensus forecast for Q4 is $2.20 — and could trend higher if monetization continues to show traction.

From a macro perspective, a narrowing gap between consumer inflation and wage growth could allow more household budgets to accommodate one or more streaming subscriptions. Rate hike reversals, or expectations thereof, could also boost consumer sentiment and willingness to spend on non-essentials. 

Another potential catalyst for the stock is Netflix's push into livestream sports. The company is reportedly rolling out a live-stream celebrity golf event this fall, a mash-up of pro golfers and Formula One race car drivers. The move may be a preview of a broader push into a live-stream sports market that's been a priority for Netflix competitors. Amazon's lucrative Thursday Night Football deal shows that streaming players see live sports as a significant growth driver. 

However, the market's more immediate focus will be the estimated 100 million households accessing Netflix services via password sharing. So far, Americans are more than willing to fork over $8.00 or cough up money for their subscriptions to keep watching their favorite shows. And with Netflix's summer release schedule of original series and movies expanding, it may become even more challenging for consumers to resist signing up.

Regarding valuation, at 47x trailing earnings, Netflix shares are still trading well below their five-year average of 77x. Based on Compustat's five-year earnings growth projection, the stock's 2.2x PEG ratio also has room for expansion.