Three bearish scenarios and a $1400 target: Is Netflix stock worth buying on a downturn?

Netflix's stock lost 15% of its all-time high reached in late June. More than half of this fall occurred after the streaming giant unexpectedly reported tax losses in Brazil in late October, which negatively affected third quarter earnings. MoffettNathanson analyst Robert Fishman saw three new negative scenarios for Netflix investors at once, but bets on the growth of quotations.

"We view the recent pullback in quotes as an optimal opportunity for investors to capitalize on the next stage of Netflix growth," MarketWatch quotes Fishman's research note as saying. At the same time, the analyst warned clients about the emergence of three possible "bearish" scenarios that put the stock's growth prospects in doubt, the publication notes.

First, Fishman pointed to signs of slowing growth in user engagement. Netflix's share of the time spent watching streaming content in the U.S. in the first half of the year remained unchanged, while Google's free video hosting service YouTube surpassed it and continues to grow. At the same time, the analyst stated that Netflix is still significantly ahead of competitors in the market of paid streaming services.

Second, Fishman said, Netflix's "change in tone" on M&A could signal that the streaming giant is having trouble expanding its content offerings and sees M&A as the best way to do so. Netflix has traditionally avoided big acquisitions, but is now preparing to buy the studios and streaming business of Warner Bros. Discovery. "The financial burden of such a deal could significantly weaken Netflix's balance sheet and dilute shareholder stakes, depending on the structure of the offer," warned analyst MoffettNathanson.

If Warner Bros. Discovery is acquired by competitors, a third "bear" scenario is possible: the new owner may stop selling Netflix the rights to show old movies and TV series. However, the main driver of Netflix user engagement is its own content, Fishman emphasized.

Despite the risks, MoffettNathanson maintains a Buy recommendation on Netflix shares and a target price of $1400 per share - above the market average. This benchmark implies a 21% growth of the company's quotes relative to the closing level on November 12. All three "bearish" scenarios are unpleasant, but not critical for Netflix: the chances of the streaming giant to continue to grow are still high due to the expansion of presence in the segment of live sports broadcasts and the development of advertising direction, the analyst says.

According to FactSet, the majority of analysts on Wall Street also advise Netflix shares to buy. At the same time, over the past three months, the mood of experts has improved: the number of positive ratings Buy and Overweight increased from 34 to 38, and the number of neutral (Hold) decreased by almost a third - from 19 to 13. The skeptic camp is still in the minority, with two Sell and Underweight recommendations. The average target of $1366.5 per share implies a potential upside of 18% from the current price.

This article was AI-translated and verified by a human editor