On Monday, Barclays analyst Kannan Venkateshwar warned about Netflix’s (NFLX) growth prospects. On the same day, Netflix’s share prices fell 31% from their 52-week high of $386.80. In a note, the analyst said that the company’s management won’t incorporate any changes to the current business model. As a result, he said that “the stock is very expensive relative to its TAM (total addressable market).” Among the 45 analysts tracking Netflix, 67% recommend a “buy” or “strong-buy.” Only 9% of the analysts surveyed by Reuters recommend a “sell” or a “strong sell,” while the remaining analysts recommend a “hold.” Analysts’ mean target price is $380.46, which suggests a potential upside of 43.2% from the last closing level. However, the S&P 500 Index (SPY) is 1.2% below the 365-day high.
Barclays discussed Netflix’s valuation
According to Barclays, to justify the current valuation, Netflix’s management has to realize a higher revenue per user. At the same time, the subscriber churn rate should decline. Barclays estimates that Netflix’s TAM will be around 700 million subscribers by 2026. However, the current valuation suggests a TAM of between 750 million and 1.3 billion subscribers in the next seven years. In the last quarter, Netflix had around 151.6 million subscribers. The company has to grow the subscriber base at least more than five times to justify the current valuation. In the second quarter, Netflix lost US subscribers for the first time in the last eight years due to higher pricing.
Competition is gearing up
Disney+ streaming service could wipe out Netflix’s subscriber base by 32%. The streaming services will launch in November. Apple TV+ has a free trial. Will Netflix be able to retain its subscriber base? Hulu also increased its subscriber base. The company reduced its subscription cost to boost the subscriber base. Higher competition due to new entrants and the price war could impact Netflix’s subscriber base and revenue going forward. Barclays suggests that the company won’t cross the TAM of 700 million subscribers. However, the company should focus on increasing its advertisement revenues, which might compensate for the gap from the required TAM, according to Barclays.
Technicals and target prices
On Monday, Netflix’s share prices closed 8.6%, 13.8%, 20.6%, and 20.7% below their 20, 50, 100, and 200-day moving averages, respectively. The 50-day moving average was 8.1% below the 200-day moving average. On September 3, the 50-day moving average moved below the 200-day moving average for the first time since March 13. Between September 3 and September 23, Netflix’s stock prices fell 9.5%. When moving averages cross over it’s called “death cross,” which suggests more weakness for the stock prices.
On Monday, Netflix’s implied volatility was 51.8%. Based on the implied volatility, Netflix’s prices will likely close between $248.27 and $283.75 until the end of September. The price forecast is based on the normal distribution of prices. There’s a 68% probability for this price range.