After Netflix (NFLX 1.74%) lost 200,000 subscribers in Q1 and nearly 1 million customers in the second quarter, its shareholders have lost faith in the company's outlook, questioning if the days of monster growth are over.
This sentiment is evident in the stock's performance, which is down 48% this year.
However, investors could be turning optimistic about the business. Shares are actually up a remarkable 70% in the past six months, and there could be more of this positivity heading into next year.
Implying a 29% gain from today's price of $310 per share (as of this writing), is it possible that this top streaming stock will hit $400 by the end of next year? Let's take a closer look.
Pressing fast forward on a challenging year
Investors would surely be satisfied with a 29% return in 2023, given how difficult this year has been for the business.
Netflix lost customers in the first six months of 2022. And the stock, spurred by rising interest rates and the market souring on growth tech stocks amid a weakening economic background, has dropped a lot this year. This was after Netflix shares skyrocketed about 6,000% during the 10-year period between the start of 2011 and the end of 2021.
In the most recent quarter (ended September 30), the company reported adding 2.4 million new subscribers to the service, which was a positive sign for shareholders to see. And in the current quarter, the business is expected to add 4.5 million new members, bringing the estimated total to 227.6 million.
To provide a necessary boost, a much anticipated ad-based membership tier was finally introduced, priced at $6.99 per month in the U.S. This option is now available in 12 markets.
It's too early to tell how much this will add to Netflix's top line, projected to be $32 billion in 2023, but it's something that could be lucrative over time. Also, the business will focus more on cracking down on accounts that share passwords among multiple households.
Nonetheless, one thing is certain: Netflix is operating in an extremely competitive streaming industry today. Even considering the potential impact of the company's ad-supported subscription tier and tighter account-sharing policy, subscriber and revenue growth in the years ahead is going to be much more difficult to achieve.
Here's what needs to happen
Right now, Netflix shares are trading at a price-to-earnings ratio (P/E) of 28. If we assume that this valuation multiple stays the same 12 months from now, then the company's earnings must rise by 29% for the stock price to increase by that same amount by the end of 2023.
To be clear, Netflix's P/E ratio can fluctuate either up or down, especially within the next year, but this is impossible to predict. Therefore, for this analysis, the best approach is to leave this constant.
How likely is it that Netflix's earnings will grow 29% next year?
Management doesn't provide guidance further out than the next quarter, but we can look at Wall Street's analyst consensus estimates. They're calling for the company's revenue and net income to increase 7% and 14.2%, respectively, in 2023, compared to 2022.
Based on this, a $400 price target is unlikely within the time frame we're looking at.
Netflix's stock was well above $400 for the majority of the trailing-three-year period, so investors might quickly assume that hitting this milestone is a sure thing in 2023. But this is a flawed assumption.
Just because a company's stock was at a certain value before doesn't mean it deserves to be there again. Additionally, astute readers will realize that the past few years have been characterized by loose monetary and fiscal policy (except for this year), and this environment is a boon for stocks.
Furthermore, it's virtually impossible to predict what will happen to a stock in a 12-month time span. There are so many factors at play, the most important being that investor sentiment is influenced significantly by what the Federal Reserve does.
If interest rates continue climbing higher throughout 2023, it's hard to see risky assets, especially growth tech stocks like Netflix, performing well. On the other hand, a more accommodative stance by the central bank would certainly provide a boost to share prices, increasing the chances that Netflix would reach $400 per share.
Investors should ask themselves whether or not they like Netflix as a long-term investment (over the next five years). If so, then buying today might be a good financial decision.
