Shares of Fallen Streaming Sweetheart Netflix (NFLX) rose 1.2% on Wednesday after announcing a partnership with Microsoft (MSFT) on its highly anticipated ad-supported level.
Undoubtedly, Netflix needs to pivot to regain its growth multiple. Although the 73% drop was violent, bringing the price/earnings (P/E) multiple into the 17x range, I think there are plenty of levers CEO Reed Hastings can pull to recover the stock. FAANG fell on Track.
For now, all eyes are on Netflix with ads. Before an economic downturn, the service could have the potential to be a hit as consumers look to save a little money wherever possible. I’m bullish on Netflix.
Despite their size, FAANG shares are still finding a way to leverage technological innovation to maintain their growth rate. Now that the video streaming market has matured, Netflix must cross new frontiers.
Just as various members of the FAANG cohort have rebranded their companies to mark a change in direction or a broadening of focus, Netflix must adapt or run the risk of falling further.
Now, Netflix has already taken a hit for its multiple. At around 17 times earnings, one must think that the valuation reset is almost complete. With a headwind of higher rates, intensifying competition and shrinking consumer budgets continuing to weigh on quarterly earnings, Hastings’ task will not be easy.
Some of Netflix’s streaming and media peers are trading in the single-digit P/E range. Although Netflix is a much higher quality content provider, it needs to find ways to stand out from its rivals if it wants to get a premium. Like it or not, today’s depressed multiple may not be depressed enough if Netflix cannot pivot effectively.
Netflix partners with Microsoft for ad-based subscriptions
Microsoft’s partnership on its ad-based subscription is just one intriguing lever that Netflix has pulled. Coincidentally, Microsoft is also the tech titan behind the “Netflix of Gaming” service named Xbox Game Pass.
I think the Netflix-Microsoft partnership is one that could greatly benefit both parties. Moreover, if the partnership proves promising, it could serve as a launching pad for other partnerships. Without a doubt, a subscription that includes Netflix and Xbox Game Pass – the Netflix of games – could be an impossible bundle for consumers to pass up.
With the acquisition of Activision Blizzard by Microsoft (ATVI) meanwhile, a Netflix takeover seems doubtful at this point. Either way, partnerships can be key to helping both parties thrive in the rapidly changing entertainment space.
As Netflix looks to double down on video games, Microsoft might be able to step in at some point down the road.
Netflix with Ads Could Help Stocks Perform Better in a Recession
It is difficult to assess how an ad-supported level will affect the quarterly results going forward. Indeed, many of today’s paying subscribers could switch to a lower cost, ad-supported tier to save a few bucks.
Still, I think such a level attracts many subscribers who canceled in the first half of 2022. Indeed, Netflix may not have had the strongest content slate in the first quarter of 2022. However, the main driver cancellations can be the crushing weight of inflation on consumer budgets.
The ad-based tier solves such a problem and could help Netflix win back lost customers and then some as we get closer to an economic downturn.
Additionally, new content and the inclusion of more mobile games could help Netflix sweeten the pot for its users. In difficult times, people always want to be entertained. They will simply be more selective about the money they spend on entertainment.
With hundreds of video games likely to come out of the Netflix pipeline in the years to come, the firm seems on the right track. It is poised to deliver more value to consumers rather than simply seeking to target profiteers and raise prices – moves seen as unfriendly to some consumers.
Wall Street’s view on NFLX
As far as Wall Street is concerned, NFLX stock is stuck. Out of 41 analyst ratings, there are 10 buys, 25 holds and six sell recommendations.
Netflix’s average price target is $258.58, implying a 36.7% upside. Analyst price targets range from a low of $157.00 per share to a high of $400.00 per share.
NFLX Smart Score Assessment
Interestingly, NFLX has a Smart Score rating of 6 out of 10 on TipRanks. This implies that it is likely to move in line with the market and is in line with the analyst consensus Hold rating.
The Bottom Line on Netflix Stock
Netflix is in a world of pain right now, but there’s reason to believe most of the headwinds have fallen in the rearview mirror. The ad-based level could help Netflix shares through the coming economic downturn en route to much higher levels.
The partnership with Microsoft is a big plus and could be the start of new mutually beneficial relationships between the two entertainment heavyweights.