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Netflix (NFLX) came in ahead of estimates in the second quarter as its ad-supported tier continued to gain traction. However, shares of the entertainment giant closed down some 5% on Friday.
Investors are bailing on NFLX shares even though the streaming giant raised its full-year guidance as well mostly because of valuation concerns.
Despite today’s decline, Netflix stock is up nearly 50% versus its year-to-date low set in mid-January.
Should You Buy Netflix Stock on the Post-Earnings Dip?
In a post-earnings interview with CNBC, Mark Mahaney, the head of internet research at Evercore ISI, agreed that Netflix reported a decent quarter but said “I’m not entirely sure there’s reason to aggressively buy the stock here.”
While Mahaney remains bullish on NFLX shares for the longer term, with a price target of $1,350 indicating potential upside of more than 10% from current levels, “at a 40 P/E multiple, they’re at the upper end of their valuation range” already, meaning limited upside in the near term, he added.
What Will Drive Future Growth for NFLX Shares?
According to Mahaney, the streaming stock is leading the content game and that too by a fair margin, but “the question is: What else is going to be new?”
On Friday, the analyst argued NFLX management must focus on sports and live events to drive future growth. Plus, he expects advertising to account for a bigger chunk of the company’s revenue moving forward.
His view echoes Mark Zagorski, the chief executive of DoubleVerify, who sees Netflix as offering the “holy trinity” – quality, performance, and scale – to advertisers in 2025.
In a separate interview, Zagorski said artificial intelligence (AI) was positively contributing to the entertainment firm’s advertising strategy as well, which could bring an even higher price tag to Netflix shares in the second half of this year.
How to Play Netflix at Current Levels?
Despite a strong earnings print, investors are recommended waiting for a deeper pullback before loading up on Netflix stock as other Wall Street analysts also share Mahaney’s concerns related to its valuation.
While the consensus rating on NFLX shares currently sits at “Moderate Buy,” the mean target of about $1,249 indicates potential upside of only 3% from here.
