What happened
Netflix (NFLX 2.47%) had another good day on Wednesday, extending a bullish span that started with the third-quarter report on Tuesday, October 18. Another analyst joined the Greek chorus of impressed market watchers, driving Netflix stock as much as 5.1% higher by 11:40 a.m. ET. The gain had cooled down to 2.6% by the closing bell.
So what
Pivotal Research analyst Jeffrey Wlodarczak lifted his Netflix rating two full steps this morning, from a "sell" to a "buy." Pivotal's price target for the stock nearly doubled from $200 to $375 per share. The old targets were among the lowest analyst ratings for Netflix, but the updated view currently carries the highest price target of any analyst.
Wlodarczak conceded that his former analysis was too conservative. He expects the ad-supported subscription plan for $7 per month to boost Netflix's subscriber numbers significantly, with limited cannibalization of higher-priced viewing plans. The analyst also noted that streaming rivals such as Walt Disney (DIS -0.12%) and Apple (AAPL -0.82%) are raising their monthly fees for video-streaming services, which arguably gives Netflix a more comfortable market position. In a note to clients, the Pivotal analyst said:
While competition is heating up, [Netflix] still provides the most unique and powerful streaming experience globally with a reasonable path to accelerate subscriber growth over at least the next year.
Now what
I agree that Netflix is a great buy at today's muted share prices, but my reasons are different from Wlodarczak's. As a longtime Netflix investor, I fear that the ad-based subscription plan may undermine one of the company's greatest strengths, which is to serve great content in an extremely simple and user-friendly format. The Basic with Ads service complicates Netflix's price list, and it will certainly provide a lower-quality viewing experience than the ad-free alternatives.
On the upside, I assume that very few current subscribers will want to downgrade to an inferior service. The presence of a worse viewing option doesn't matter if you're happy with what you have in one of the higher-priced service plans. Maybe I'm too nervous about the shifting business philosophy here. Only time will tell.
In the meantime, analysts and investors alike are taking their sweet time to realize that Netflix has refocused its operations from maximal subscriber growth to optimal revenue collection and cash profits. Critics have been asking for exactly this type of change for many years, but Netflix's stock price has fallen dramatically under the new strategy anyhow.
So I expect Netflix's stock gains over the next few years to result from Wall Street growing more comfortable with the company's adjusted business plan. It's great if the ad-based service works out in Netflix's favor, but I'm quite prepared to see it fail and go away. Netflix may be better off without it in the long run, even if analysts are celebrating its potential.
Either way, we agree that Netflix is a no-brainer buy right now.
