Shares of Netflix (NFLX -1.26%) jumped on Wednesday, surging as much as 7.1%. As of 11:55 a.m. ET, the stock was still up 6.7%.
The catalyst that drove the streaming pioneer higher was a Wall Street upgrade and news of another blockbuster hit.
Atlantic Equities analyst Hamilton Faber upgraded Netflix stock to overweight (buy) from neutral (hold), while simultaneously boosting his price target to $283, up from its former level of $211. This new higher price target represents potential gains for shareholders of 26% compared to Tuesday's closing price.
The analyst cited the debut of Netflix's upcoming ad-supported tier, which he believes "could be extremely material" for the streaming service, the benefits of which haven't yet been accurately reflected in analysts' consensus estimates.
Faber estimates that Netflix could generate average revenue per user (ARPU) of $26 per month from advertising, more than three times the rate of Disney's Hulu. Even factoring in the inevitable migration of existing subscribers to a lower-cost tier, Faber estimates that the move will be immediately accretive to ARPU, generating incremental revenue of $6.7 billion over the coming three years.
In other news, Netflix said that Monster: The Jeffrey Dahmer Story has accrued 196 million hours viewed in its first week, its biggest hit since the debut of Stranger Things 4 in July, which accumulated 301 million hours viewed. This news could help ease investor fears that Netflix's growth story is winding down.
It's been a tough year for Netflix. The company suffered a pandemic-related hangover, reporting back-to-back quarters of year-over-year subscriber declines, causing some investors to fear the worst.
To counter its slowing growth, the company is betting big on its lower-cost ad-supported tier, with plans to go live in multiple countries, including the U.S., the U.K., Canada, France, and Germany on Nov. 1, earlier than previous estimates of early 2023. Much of the company's future success will hinge on getting its ad-supported tier right.
That said, Netflix has dealt with adversity before, emerging from these challenges a stronger, more successful company. And at roughly three times next year's sales, the stock is selling near its cheapest valuation in nearly a decade.
My money is on Netflix.