On Friday, Netflix (NASDAQ:NFLX) received an upgrade to 'Buy' from 'Hold' by Needham, with the firm setting a new price target of $700 for the streaming giant's stock. The upgrade follows Netflix's first-quarter earnings release, which showcased a revenue of $9.4 billion, marking a 15% year-over-year increase and surpassing estimates by 1%. The company's GAAP earnings per share (EPS) also rose significantly by 83% year-over-year to $5.28, exceeding estimates by 18%.
Needham's decision to upgrade Netflix is based on several key factors. First, analysts anticipate revenue growth due to the company's technological advancements, including GenerativeAI, which is expected to be particularly beneficial for tech-first companies like Netflix. Additionally, Netflix's global scale is seen as a major advantage in maximizing the value of its data.
The firm also cites upcoming price increases and advertising revenue as catalysts that should accelerate Netflix's revenue growth and expand its profit margins. Analysts' positive outlook is further bolstered by the company's strong first-quarter subscriber additions, which totaled 9.3 million, bringing the total subscriber count to 270 million.
Furthermore, Needham highlights Netflix's free cash flow (FCF), which reached $2.1 billion in the first quarter of 2024. The firm believes that Netflix's FCF and return on invested capital (ROIC) will continue to outperform estimates. This is attributed to the company's stable content spending of $17 billion and the ratio of cash content spending versus amortization remaining at approximately 1.1 times.
In addition to these financial metrics, Netflix has indicated plans to use its FCF to repurchase shares instead of paying down debt, a strategy that could potentially enhance shareholder value. The combination of these factors has led analysts to raise their estimates and provide a more optimistic outlook for Netflix's stock performance.