For many, holding on to a nice cash cushion or identifying potentially undervalued blue chip stocks are logical, and safe, investment strategies in times of economic trouble. Economists around the globe are looking into their crystal balls, with some calling for a recession, while others think we're approaching a market bottom.
As we approach the end of 2022, investors are beginning to look ahead to find inspiration for 2023. Over the last week, two Wall Street banks upgraded streaming platform Netflix (NFLX -0.20%). It is no secret that the company is battling intense competition from Disney, Apple, and Amazon. But it has a lot in store for 2023. Let's dig into the upcoming catalysts and analyze if now is an opportune time to buy the stock.
Content is king
Netflix's identity has changed significantly over the years. It was created to facilitate online DVD rentals in an effort to save customers the time and effort of going to a brick-and-mortar movie rental store.
Eventually, as content became digitized, Netflix became the home of high-profile and in-demand movies and television shows, hence spearheading the cord-cutting dynamic. However, due to the complexities of licensing agreements with distributors as well as other media outlets trying to compete, management needed to pivot its strategy toward something new: original content. Over the last several years, it has invested significant capital into developing its own original television series and movies.
Although Netflix has been developing content for several years now, 2022 has been jam-packed with popular hits across a variety of genres. For example, the science-fiction thriller Stranger Things made its debut in 2016. Its fourth season hit the streaming platform over the summer and broke several of the company's viewership records.
Netflix's fall lineup included two shows that were based on real-life events: Monster: The Jeffrey Dahmer Story as well as The Watcher. And as investors learned during the third quarter earnings call, The Jeffrey Dahmer Story was another smash hit and ranks in the top five English-speaking original content shows all-time for the streaming company.
The company is supercharging its year-end lineup, with the original series Wednesday (based on The Addams Family), as well as a star-studded ensemble cast for Glass Onion, the long-anticipated mystery film and sequel to Knives Out.
Netflix gave Glass Onion a limited theatrical release, using a strategy where moviegoers spread word-of-mouth reviews, thereby enticing people to subscribe to Netflix and explore its library. This method only works if the content is good, of course. Judging by its 93% Rotten Tomato scores from both critics and audiences, Glass Onion appears to deliver the goods.
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Will the investments pay off?
While its original content may be grabbing the headlines, Netflix has several other catalysts in the pipeline. After years of dodging the inevitable, it has finally launched partnerships with advertisers. One of the main selling points for Netflix was that viewers could watch a television show or movie and bypass interruptions of previews and commercials. But in October, the streaming pioneer launched a lower-cost subscription plan that includes ads.
Another effort that Netflix has made a priority is curtailing password sharing. For years, it was lenient on subscribers sharing their accounts with friends and family. But some investors could argue that Netflix was deflating its reported subscriber base, and therefore missing out on additional revenue.
Now, management has stated that beginning next year, the company would begin charging additional fees to those who share their accounts. By doing so, Netflix now has the ability to raise prices for existing subscribers who share passwords, or gain new subscribers from those who leave a shared account and create their own paid subscription.
The combination of engaging original content, a new lower-cost ad tier, and a crackdown on password sharing should help provide new revenue streams for Netflix. More importantly, the recurring revenue that results from new subscribers can help generate meaningful cash flow, which it can use to reinvest into the business and continue differentiating itself from the competition.
Keep an eye on valuation
Over the last week, both Wells Fargo and Cowen (COWN) raised their respective price targets for Netflix stock. Cowen raised it from $340 to $405, whereas Wells Fargo increased it from $300 to $400. Given that the stock currently trades at $290 per share, both of these price targets imply 40% upside.
It's important to note that by doubling down on original content, as well as identifying new areas to generate revenue growth in the form of advertising and eliminating password sharing, Netflix is doing all that it can to move past the intense competition.
For example, While Disney's streaming service has garnered widespread popularity, it has come at a steep cost. Wall Street has taken notice of these mounting losses, and some investors are beginning to look elsewhere. Shannon Saccocia, chief investment officer of SVB Private, recently said during an interview on CNBC that she has exited her position in Disney stock, citing strains on free cash flow and an unclear path to profitability.
By comparison, as shown in its third-quarter results, Netflix has managed to generate consistent profits. For that quarter, ended Sept. 30, it reported net income of $1.4 billion, and $4.4 billion for the first nine months of 2022. Operating losses in Disney's streaming service more than doubled year over year to $1.5 billion for the quarter ended Oct. 1.
Although Netflix has a lot to prove in 2023, the company's consistent profitability, coupled with new revenue levers and growing original content, give Wall Street several reasons to be bullish on the stock. Now could be a great time to lower your cost basis or start a position from scratch.
