It’s fashionable to be bearish on Netflix (NASDAQ: NFLX) these days, giving one of the stock’s biggest bears a rare opportunity to gloat. Wedbush analyst Michael Pachter is out with a new note, reiterating his bearish underperform rating and $125 price target.
The stock finds itself 24% off the all-time highs it set back in June, making this a seemingly appropriate time for naysayers to whip out their “I told you so” notes. The rub here is that Pachter has been down on Netflix for years, and it’s been the wrong bet in that time. The stock would have to plummet another 61% to hit $125, and while anything is possible in the market these wild-swinging days, it’s certainly not probable. Let’s go over the reasons why Netflix is unlikely to fall that low.
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1. The analyst has been dead wrong on Netflix before
Pachter has made a lot of winning calls over the years, but this has clearly not been one of them. A $125 price target on the stock is actually a dramatic improvement over earlier calls. Two years ago, he was perched at $45. Back in 2005, he had a price goal of $3 on the stock, and keep in mind that this was before a 7-for-1 stock split a decade later, so it’s actually a target of $0.43.
Netflix stock has been nearly a 750-bagger off his 2005 price target. Rest assured that it has never actually traded that low.
Pachter argues that the stock is overvalued. It’s true that Netflix shares have never been cheap by nearly any measuring stick, but it’s hard to take the knock seriously when someone’s been wrong for so long with the same argument. He’s the boy who cried bear. I like that. I like that a lot.
His thesis is factual. Netflix is sporting negative free cash flow, and heavy investments in content and expansion will weigh on its cash for years. Thankfully for those long Netflix, the stock market also rewards top-line growth and game-changing dominance in a booming niche.
2. Netflix finds a way to bounce back from the dead
There are lulls in every monster run, and we’ve seen that in Netflix despite being one of the market’s biggest gainers over the past five years. The ability to bounce back matters. In a bullish note this summer — following a rare guidance miss — Ralph Schackart at William Blair pointed out that Netflix has fallen short of its public forecast just four times out of the past 22 quarters. Like one of the many zombie shows and movies on the service, Netflix has a funny way of crawling its way out of its grave whenever it proves mortal.
It’s not fun to see Netflix have to dial back its earlier growth targets. There are no guarantees that Netflix will continue its streak of following up a dud quarter with a blowout when it reports on Tuesday. However, Pachter’s timing is questionable. He’s obviously drawing attention to himself as the low bear on the totem pole just three trading days before Netflix’s next report with the conviction that the stock is going to take a hit next week. History tells us that things tend to play out in a more bullish manner.
3. Let’s not ignore international growth
A lot of the boo-birds point out that the addressable market in this country seems saturated, and that there’s a glut of services. There are now thousands of channel apps and services for your smart TV. We can’t forget that Netflix’s headiest growth in recent years — and the driver in the future — will be international viewers.
If you feel as if everyone you know who wants Netflix already has it, whip out your passport and get globetrotting. Netlfix’s international streaming revenue overtook domestic revenue in the second quarter, and that’s not going to change. International streaming revenue has soared 65% over the past year, compared to just 26% top-line growth for Netflix’s U.S. streaming business.
There will be challenges from country to country, and Pachter is right in calling out all of the dough that Netflix is spending to stay in compliance in each region as well as invest in content that matters to each market. The point is that Netflix is bigger than the stateside market. There’s a whole wide world out there for Netflix to continue feasting on, and bears will only get to brag in the short downward spurts between the longer bullish runs.
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