Netflix (NASDAQ:NFLX) stock’s comeback has been quite explosive, with shares now up more than 115% off June lows. Reed Hastings‘ recent resignation as co-CEO to become the executive chairman comes on a relatively high note, with the company reporting some decent results. Despite this, questions linger as Netflix enters uncharted territory, with a recession on the horizon and potential catalysts to turn the ship around. Though many analysts may have turned bullish after recent relief gains, I remain neutral on the stock.
The market seems to have looked past the stepping down of Reed Hastings. Investors probably feel more forgiving, given the recent round of encouraging numbers. Still, it’s hard to say where Netflix goes from here. The stock’s multiple now stands at a more palatable at 36.2 times trailing earnings, a long way from where the stock spent most of last year (around 50-60 times price/earnings).
However, when you consider media stocks trading at single-digit price/earnings multiples, like Paramount (NASDAQ:PARA), Netflix still sports a relatively rich multiple. I believe Netflix needs to prove to investors why it deserves to trade at such a wide premium. Undoubtedly, Netflix is the better streamer with a deeper content library. As its rivals look to close the gap, the real question is how Netflix plans to retain or widen it.
Netflix and the Ever-Evolving Streaming Market
The streaming market has gotten crowded, perhaps too crowded for Netflix to remain a growth company worthy of the FAANG basket. Further, many of the “catalysts” (think an ad-supported tier launch, efforts to crack down on password sharing, and a pivot into the video-gaming market) may not be able to deliver in the way investors expect.
Sure, expectations may be lower today than a year ago, but it’s a mystery as to whether they’re low enough, especially as streaming peers look to go on the offensive.
Indeed, it’s a pivotal time for Netflix as it looks to get its hand in more pies. I think the stakes remain quite high as the industry enters a more mature stage.
To have Reed Hastings stepping back as one of the top bosses doesn’t give me a jolt of confidence to step into the stock as it continues to claw back the massive amount of ground it lost last year.
I think the Netflix story is getting a tad messy for analysts to value as it looks to move into parallel businesses like gaming. Many video game stocks are in a rut of their own right now.
It’s also becoming harder to adapt to gain an edge over the growing number of rivals hungry to capture the hearts of streamers in an era where economic circumstances could induce subscription-cutting.
For now, Netflix has a growing line-up of mobile games that its peers can’t offer. Still, the company needs to do a lot more for its gaming business to positively impact its financials.
Netflix Needs to Show It Has Game
Last summer, analytics firm Apptopia noted that less than 1% of Netflix subscribers showed interest in its games. Undoubtedly, the requirement to download each Netflix game separately through the Apple (NASDAQ:AAPL) App Store as opposed to being able to play through the Netflix app may be impeding interest.
In any case, the gaming push may not have enough at stake to really move the needle. If anything, getting into gaming may introduce more risks than potential rewards, although this could change over time. Nonetheless, where video game stocks sit today is certainly not an encouraging sign for potential market newcomers.
Looking ahead, the company is hard at work on its first big-budget PC game. If it’s a hit, Netflix could be saved, and it could warrant a higher price-to-earnings multiple. If not, Netflix could be running short of options and may need to head back into its circle of competence within video content.
That’s not a terrible thing, but as the streaming market grows more commoditized, it could be way tougher to grow.
Is Netflix Stock a Buy, According to Analysts?
Turning to Wall Street, NFLX stock comes in as a Moderate Buy. Out of 35 analyst ratings, there are 17 Buys, 16 Holds, and three Sell recommendations. The average Netflix price target is $347.29, implying downside potential of 1.65%. Analyst price targets range from a low of $215.00 per share to a high of $440.00 per share.
The Bottom Line on Netflix Stock
Netflix stock will be very eventful through 2023. We’ll finally get to see how its initiatives impact its top and bottom lines. However, for now, I’d rather wait and see how things pan out. The stock has bounced significantly from its low, and Hastings stepping down has me feeling just a bit doubtful about the sustainability of this rally.