Netflix Inc NFLX shares jumped 5.5% on Friday after the stock landed a major Wall Street upgrade.
The Analyst: Wells Fargo analyst Steven Cahall upgraded Netflix from Equal Weight to Overweight and raised his price target from $300 to $400.
The Thesis: In the upgrade note, Cahall said Netflix has several bullish catalysts ahead in 2023, including lower churn, stable subscriber numbers and a new advertising-based video-on-demand (AVOD) subscription tier.
In addition, Cahall said many of Netflix's 2022 problems were temporary in nature.
"Our conclusion is that 2022 reflected a dip in content share, a lack of original hits for a time and the digestion of the COVID sub comp, none of which should be read forward," he said.
Wells Fargo projects the AVOD tier will be accretive to average revenue per user (ARPU) by the second half of 2024 and will drive more than 23 million incremental subscribers by 2025. Cahall estimates Netflix will add 55.5 million total subscribers through 2025, roughly 40% of which will come from the AVOD tier.
Wells Fargo projects Netflix's AVOD ARPU of around $12 per month in 2023 and AVOD incremental revenues of $300 million in 2023, $1.6 billion in 2024 and $3.4 billion in 2025. Cahall said Netflix is positioned to generate $8.1 billion in total ad revenue in 2025.
In addition, Cahall said Netflix's crackdown on password sharing should boost paid subscriber numbers in 2023 and beyond.
Netflix reported 5.9% revenue growth in the most recent quarter, but Wells Fargo projects revenue growth will rebound slightly in 2023 to 7%.
Benzinga's Take: Netflix shares are down 46.5% overall in the past year over concerns about slowing revenue and subscriber growth. However, the stock has found its stride in the past six months, gaining 69.2% on renewed optimism that advertising and password crackdowns will help jumpstart growth once again in 2023.
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