Netflix Inc (NASDAQ:NFLX) shares traded higher by 3.3% on Monday after the company received an upgrade on Wall Street.
The Analyst: Wedbush analyst Michael Pachter upgraded Netflix from Neutral to Outperform and reiterated his $280 price target.
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The Thesis: In the upgrade note, Pachter said Netflix still has problems, but the company is beginning to address them. Netflix shares are down 68.8% year-to-date, and the stock tanked after Netflix reported it lost 200,000 subscribers in the first quarter. Pachter said this subscriber loss is primarily due to Netflix's deep saturation of the U.S. and Canadian markets.
Pachter said Netflix is making two major changes to its business model to address the recent weakness. First, Netflix said it will be cracking down on password sharing, a move that Pachter said will likely gain Netflix no more than a few million new subscribers.
However, the company is also adopting a subscription supported by ads, a move Pachter said could potentially drive significant revenue growth for Netflix. The one caveat to an ad-supported subscription is that it could potentially cannibalize existing paid subscriptions, a dynamic that investors will need to watch closely.
Pachter said he is bullish on Netflix's ad-supported subscriptions and said they could help Netflix reduce churn. Pachter said Netflix's recent decisions to split seasons of popular shows "Ozark" and "Stranger Things" will likely also prove to be successful in reducing churn.
Looking ahead, Netflix may not be the high-growth tech stock it once was, but Pachter said the stock has value at its current price.
"We believe Netflix is now an immensely profitable, slow-growth company," he said.
Benzinga's Take: Just a few years ago, it would have seemed crazy for Netflix's stock to be trading at just 15.6 times forward earnings. Even though Netflix's subscriber count dropped in the first quarter, the company still grew revenue by nearly 10% and net income by 140% year-over-year.
