Netflix’s recent crackdown on password-sharing has proven to be a success, prompting one bearish Wall Street analyst to upgrade the stock. In a note released on Tuesday, Goldman Sachs raised its rating on Netflix from Sell to Neutral and increased its price target from $230 to $400. Despite still implying a potential downside of approximately 9% from current levels, Goldman Sachs believes that Netflix’s underlying business will continue to grow significantly in the next couple of years.
Previously, Goldman Sachs had issued a Sell recommendation based on several concerns, including the normalization of post-pandemic subscriber growth, increased competition in the industry, potential pressure on subscriber additions due to the consumer spending environment, and uncertainty surrounding Netflix’s password-sharing crackdown. However, none of these concerns materialized as Netflix’s stock soared 135% since the firm’s initial Sell recommendation in June 2022, greatly outperforming the S&P 500’s gain of just 12.5% during the same period.
The key factor that contributed to Netflix’s success was its effective implementation of the password-sharing crackdown. This initiative has prompted millions of consumers to start paying for the service, resulting in fewer subscriber losses than anticipated. In addition, Netflix’s introduction of a low-cost advertising tier has also played a role in boosting subscriber numbers.
Goldman Sachs analyst Eric Sheridan estimates that if Netflix continues to execute its initiatives successfully, the company’s revenue could grow by 55% to around $49 billion by 2025. Furthermore, the firm predicts that Netflix’s GAAP earnings per share in 2025 could range from $22 to $27, compared to the $10 per share earned in 2022.
To achieve these optimistic projections, Goldman Sachs assumes that Netflix will convert 70 million of its estimated 100 million password sharers into paying customers. This can be accomplished by either adding another household to an account for $8 per month or subscribing to the lower-cost, ad-based plan. Additionally, the firm expects Netflix’s core subscriber base to grow by approximately 2%.
Despite the positive outlook, Sheridan maintains a Neutral rating for Netflix due to insufficient visibility into the company’s underlying business. However, he acknowledges that the probability of an upside scenario is high, making it unlikely for the stock to underperform in the coming quarters.
In conclusion, Netflix’s successful password-sharing crackdown has convinced Goldman Sachs to upgrade its rating on the stock. The firm has expressed optimism about Netflix’s future growth potential and expects the company to capitalize on its initiatives to drive revenue and earnings. However, due to limited visibility, Goldman Sachs maintains a cautious stance, labeling the stock as Neutral.
