Netflix, Inc. (NASDAQ:NFLX) shares surged following the streaming giant’s robust third-quarter results, prompting analyst Justin Patterson at KeyBanc Capital Markets to jump on the bullish bandwagon after staying on the sidelines since January 2022.
Patterson upgraded Netflix shares from “Sector Weight” and set a $510 price target for the stock, implying a substantial 47% upside potential from current levels. This revised price target is determined by a valuation multiple of 25 times the estimated earnings for 2025.
The Netflix Thesis
“Netflix is entering 2024 as a cleaner story,” noted Patterson in a report. He based his argument on the premise that paid sharing has altered the company’s capacity to reach an additional 250 million subscribers, while ongoing buybacks are expected to sustain a growth profile of over 25% in earnings per share. On Wednesday, Netflix bolstered its buyback authorization by $10 billion, adding to the $1 billion remaining from the previous allocation.
Patterson also highlighted the consistent increase in operating profit and free cash flow.
Detailed Analysis of Netflix’s Performance
Delving into the numbers, Patterson pointed out that Netflix’s third-quarter revenue of $8.5 billion met consensus expectations. The earnings per share of $3.73 surpassed the consensus estimate of $3.51. In terms of net subscriber additions, a critical user metric, Netflix recorded 8.2 million, outperforming the Street estimate of 5.9 million.
Patterson anticipates 13 million net additions in both 2024 and 2025, incorporating only partial benefits from paid sharing, leading to outsized earnings per share growth in these years.
“While the third-quarter 2023 earnings season is still in its early stages, we believe Netflix is a unique asset that can provide investors with growth across various economic environments,” Patterson said.
The analyst raised his earnings per share estimates for 2023, 2024, and 2025 by 6%, 8%, and 12%, respectively, arriving at figures of $12.08, $16.37, and $20.40. Additionally, he increased his free cash flow projections to $6.7 billion, $7.1 billion, and $8.9 billion, respectively.
In premarket trading, Netflix shares rallied 12.84% to $390.64, according to Zenger News Pro data.
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Produced in association with Benzinga
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