Netflix Stock: Buy the Dip
Even though streaming-TV service company Netflix (NASDAQ: NFLX) stock has fallen sharply since the company reported underwhelming second-quarter revenue growth last week, one analyst is raising his price target for the stock. The analyst is so bullish that he upgraded his rating on the stock from neutral to outperform and boosted his 12-month price target by nearly 50%. Shares could rise another 17% over the next 12 months, he projects.
Here's a closer look at some of the key takeaways from the company's second-quarter update and what's behind this analyst's aggressive $500 price target for the stock.
Netflix earnings: What you need to know
Interestingly, Netflix's second-quarter results were pretty solid, with earnings per share coming in well above analyst estimates. Revenue for the period was about $8.2 billion and earnings per share were $3.29. On average, analysts were expecting revenue and earnings per share of $8.3 billion and $2.86, respectively.
The problem, however, was that Netflix's 2.7% year-over-year growth in revenue was underwhelming in the context of the company's ongoing rollout of a new ad-supported tier and the introduction of paid sharing. Investors may have been hoping for more surprise upside because of these two nascent but important catalysts.
"While we've made steady progress this year, we have more work to do to reaccelerate our growth," Netflix management said in the company's second-quarter letter to shareholders.
The pullback is an opportunity
With shares down about 10% since Netflix reported its second-quarter results, Baird analyst Vikram Kesavabhotla says the dip in the stock price presents investors with an "attractive entry point into a strengthening long-term investment case."
To Kesavabhotla's point, Netflix guided for a significant acceleration in its revenue growth rate in Q3: Management said it expected third-quarter revenue to increase 7.5% year over year to more than $8.5 billion. Further, Netflix Chief Financial Officer Spencer Neumann said in the company's second-quarterearnings callthat revenue should accelerate even more in Q4.
This momentum, Neumann explained, will be driven primarily by growth in paid memberships due to the company's rollout of paid account sharing. But the company's new advertising business is contributing, as well, albeit by a more moderate amount. Another driver for growth in the second half of the year, Netflix said, is price increases in some markets.
Investors should note that, even though the stock has pulled back since earnings last week, shares are still up more than 90% over the past 12 months. This run-up means investors who buy shares today are pricing in considerable growth for years to come.
Investors should be sure they have confidence in Netflix's long-term growth story before they buy shares. Highlighting how expensive the stock is, shares trade at a price-to-earnings ratio of about 50.
But management's expectation for revenue growth to accelerate in both Q3 and Q4 help make a good case for the stock -- particularly since two of the drivers behind this expected acceleration are still in their early innings. Advertising revenue, in particular, could grow to be a substantial revenue and profit driver for the company over the long haul.
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Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
