Needham Bullish on Netflix, Eyes $700 on AI Growth

Key Takeaway

• Needham upgrades Netflix to buy, sets $700 price target, citing AI growth potential.
• Despite a positive earnings report, Netflix shares dropped over 5% in premarket trading.
• Shift in reporting strategy: Netflix to stop disclosing quarterly subscriber numbers next year.

Netflix's AI Potential Recognized

Needham analyst Laura Martin has upgraded Netflix to a buy from hold, highlighting the streaming giant's strong positioning to leverage artificial intelligence (AI) for future growth. Martin's optimism is rooted in Netflix's "tech-first culture," which she believes uniquely positions the company to benefit from the evolving AI landscape. This upgrade reflects a significant shift in perspective for Martin, who has been cautious about Netflix's prospects for nearly two years, previously rating the stock as underperform before moving to a hold position.

Martin points to several factors that bolster Netflix's AI potential: the company's global scale, which enhances the value of its data; its ability to implement price increases; and the anticipated acceleration of revenue growth and margin expansion through advertising revenues. These elements, combined with Netflix's technological orientation, suggest that the company is well-equipped to navigate and capitalize on the transition to AI.

Financial Performance and Market Reaction

Despite a positive earnings report that exceeded expectations, Netflix shares experienced a more than 5% drop in premarket trading. The company also announced a strategic shift in its reporting, indicating that it will cease the disclosure of quarterly subscriber numbers and average revenue per membership starting next year. This decision marks a significant change in how Netflix communicates its performance metrics to investors and analysts.

Year to date, Netflix shares have seen a 25% rally, underscoring the company's robust market performance amidst a challenging and competitive streaming landscape. Martin's revised price target of $700 per share suggests an additional 15% upside from Thursday's close, signaling confidence in Netflix's continued growth trajectory.

Strategic Moves and Analyst Shift

The upgrade by Needham is a notable development, given Martin's historically cautious stance on Netflix. Her new buy rating and increased price target reflect a reassessment of Netflix's growth drivers and its strategic positioning within the broader media and technology sectors. Martin's analysis emphasizes the potential for AI, advertising, and pricing strategies to drive revenue growth and expand margins, alongside resilient content spending and share repurchases that are expected to enhance free cash flow and return on invested capital.

Street Views

• Laura Martin, Needham (Bullish on Netflix):

  "GenerativeAI will most benefit companies that are tech-first, and NFLX qualifies; b) NFLX has global scale, which maximizes the value of its data; c) price increases; and d) ad revs should accelerate rev growth and expand margins."