Netflix (NASDAQ: NFLX) stock might be pushing its way back into Wall Street's good graces. Shares are trouncing the market right now, up nearly 40% since mid-June compared to the 6% uptick in the S&P 500.
That broader stock market rebound is helping, but so is rising optimism about the streaming video giant's return to membership growth. Wall Street pros are also issuing bullish outlooks around its move into advertising.
Let's look at the main factors lifting expectations around Netflix in 2023 and beyond.
Return to growth
The clearest signal about an end to Netflix's 2022 stock price slump came in its mid-July earnings update. Sure, the company lost 1 million subscribers and booked its second consecutive quarter of losses on that key growth metric.
But management had forecast a bigger decline. And executives predicted a quick return to user growth in the current quarter that ends in late September.
Steady membership gains obviously make it easier to boost revenue and earnings over time. Those gains also mean the company's core growth model -- delivering more quality content while raising prices -- isn't broken.
The advertising bounce
When Netflix originally said it was exploring launching an ad-supported membership tier, most of the excitement was around how that lower-priced option might accelerate user gains. While that's true, Wall Street is also thrilled about the cash it will bring into the business.
Netflix's unique position in more than 200 million homes might allow it to charge advertisers unusually high rates. And rivals like Disney+ and HBO Max already pair strong user growth with aggressive digital advertising delivery. There's a good chance that Netflix will benefit from the same win-win scenario that brings in more members along with a new flood of advertising dollars.
The stock's path
This optimism has sparked some head-turning upgrades for Netflix's stock. One Wall Street firm recently raised its price target to $305 per share, and another is predicting it will hit $325 per share within the next year. These targets would represent a further 30% spike ahead, on top of the latest boost. Major growth avenues Wall Street sees include advertising, gaming, and a crackdown on shared user accounts.
Investors shouldn't put much stock into those short-term price targets, and instead should focus on Netflix's bigger ambitions. While the business took a step backward over the last six months following huge growth in earlier phases of the pandemic, it might quickly return to subscriber gains. Cash flow was expected to be solidly positive going forward, too, even before the advertising business takes off.
As a result, there's a good chance that Netflix will generate stronger earnings than investors were expecting in 2023 and beyond. That rebound will first require that the company reverse subscriber, which it might do beginning with the current quarter.
Watch the membership metric when Netflix reports its quarterly earnings on Oct. 20. Another surprisingly good result here would suggest that Wall Street overdid the stock price sell-off in the first half of 2022, and that Netflix has more room to soar.
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Demitri Kalogeropoulos has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
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