Cramer Is Bullish On Netflix, Inc. (NASDAQ:NFLX)

“When I look at the history of this incredible bull market, and it has been an incredible bull market, it’s littered with buy-to-hold, hold-to-sell, buy-to-hold, hold-to-sell. These downgrades scare you out of amazing stocks at levels that may temporarily be too high, but will recover later. If you listen to the downgrades, though, you’ll never recover with it.”

“In the last decade, the toughest thing to do is to hold on to good stocks. But analysts and commentators love to take aim at big long-term winners. Their jeremiads have scared so many people out of some amazing gains.”

“I need you to understand that when analysts downgrade after stocks have already been hammered, when really good investors ignore the positives, then, it may be a grim time. But not so grim that we can’t make money by focusing on the fundamentals of the companies. And not just the economy, the Fed, interest rates and oil.”

“We got a genuine analyst gunfight over the stock of Netflix. Barclays downgraded the stock from equal weight to underweight. That’s actually hold to sell while keeping their very low price target at $550. At the same time, Piper Sandler upgraded Netflix from neutral to overweight, hold to buy, and took the price target from $650 to $800.”

“These argue, and I’m gonna quote, ‘Netflix’s premium valuation is predicated on revenue growth being at least in the low double digits for some time’. But they think it’s going to be hard for the streaming giant to hit those numbers. In fact, Barclays argues that even if Netflix hits its revenue targets, the stock’s current valuation pretty much assumes the company can more than double its subscriber base, which is a pretty tall order. As they see it, Netflix is now a slowing growth story like, it trades like a steady growth story. In their view, while the company still has levers that can boost growth, these all come with serious trade-offs… Barclays actually believes that Netflix will find it harder and harder to keep delivering, which is a problem because the stock now trades at over 30 times next year’s earning estimates. Barclays also argues that as Netflix moves from a pure subscription-based system to something more of a hybrid subscription and advertising model and the company invests in things like video games [and] live events, its margin expansion will slow.”

“Interestingly, this upgrade’s also based on valuation but in a much different sense. Right at the top of the note, Piper explains, ‘Our prior neutral stance was centered around valuation, but now we appreciate the company is expensive for a reason.’ Then they continue, ‘There are still levers to be pulled in the ads-free business, particularly around pricing while the ads tier has been largely de-risked heading into next year.’

In direct contrast [to] the Barclays downgrade, the Piper analyst says, ‘Consensus margins could also prove to be conservative in 2025 and 2026 based on the incremental margins over the last few quarters.”

“The Piper Sandler analysts argue, ‘Netflix still has levers to drive non-ads business.’.. They still think though that there’s room for subscriber growth. But more importantly, Piper claims that Netflix has more pricing power, which means they can generate double-digit revenue growth without adding as many new people. In fact, they expect a price increase soon on the back of a very strong content ramp.

… the last time Netflix reported, they had an incredibly strong demand from advertisers. Management decided to approach the space carefully. Piper thinks there’s room for some upside surprise in the ad front going forward. The work I’ve done on this shows you that they can target ads better than almost anybody in the world… As the pivot continues to streaming, we gotta expect the company’s gonna maintain its leadership position, particularly as it adds more and more live content.”

“I flat-out disagree with Barclays’ bearish assertion [that] Netflix can’t hit the revenue estimates. After a period in 2022 and 2023, where Netflix did indeed miss sales numbers several times, they’ve now beaten top-line expectations for four straight quarters.

More importantly, with their ad business now ramping plus additional revenue from paid sharing plans, the company has more optionality than ever when it comes to how they’re gonna hit those revenue targets. And with Netflix no longer giving quarterly subscriber metrics starting next year, I think they can focus solely on hitting revenue expectations. That’s the new key metric.”

“Barclays is very negative here. Piper Sandler argues that even if Netflix can’t keep expanding margins like it did this year, that doesn’t mean it can’t keep putting out more gradual growth. And we agree with that line of thinking.”

“… Barclays argues that the stock’s premium valuation requires the company to do certain things. And Piper Sandler says that Netflix is expensive for a reason… Maybe I’m wrong to be so blunt, but I honestly wouldn’t get too hung up on the price-to-earnings multiple for this company. It’s never pointed you in the right direction of the stock.

What’s more important is whether or not Netflix makes the numbers. If the company beats the earnings expectations as it has in 10 of the last 12 quarters, then we don’t need to worry about a stock’s premium valuation because the share price will look a lot cheaper in retrospect. If the company can’t make the numbers, then the stock’s got no reason to be expensive and it’s going to get hit.

But the bottom line, until we hear of anyone canceling the Netflix subscriptions, maybe because of price or about any real troubles with the advertising business, which we don’t, or about the out-of-control cost and video games or live events, none of which has happened then I think Netflix deserves the benefit of the doubt and that’s why I’m sticking with the bullish side of this trade. The bear thesis? I don’t know. Too hypothetical.”