Netflix valuation to enter ‘danger zone’, warn analysts, despite being ‘overweight’; Target price hiked to $1000

Netflix stock is likely to enter “the valuation danger zone,” but market analysts at KeyBanc reiterated their bullish position and opted to raise their share price target. According to a report by Barron's, analysts led by Justin Patterson maintained an ‘Overweight’ rating on Netflix, while increasing the price target to $1000 from $785. The new price target is 9.4 per cent above current levels.

According to the report, analysts increased the target price on the stock but that came with a two-part warning. The first is on the narrative, with Netflix as the big winner of the cable-streaming TV wars. The second is valuation. Analysts noted that Netflix shares are trading at nine times enterprise value to sales, which has historically signalled that the streamer is nearing a peak valuation.

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“Historically speaking, this combination of valuation and narrative creates elevated risk for investors," said analysts at Keybanc. Despite this, they raised their price target and maintained the rating. “While this suggests investors may have priced-in recent momentum, we see several reasons to believe Netflix can outperform the S&P 500 into 2025,” said the analysts.

Netflix growth outlook

According to analysts' estimates compiled by LSEG, the streaming giant likely added four million subscribers in the July-September period. Netflix originals such as "The Accident" and "The Perfect Couple" were among the top-streamed titles in the US during the quarter, according to Nielsen data.

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As the pace of sign-ups slows, Netflix is trying to shift investor attention towards other performance measures, including revenue growth and margins. It will stop reporting subscriber data from 2025. The ad-supported plan grew in the September quarter. It does not offer details on the tier's financial performance and does not expect it to become a primary driver of growth until 2026.

Some analysts have said Netflix needs to raise prices and phase out more ad-free plans to nudge customers towards the tier with commercials, as it usually brings in more revenue per user. Last year, Netflix said it would stop offering the $9.99 a-month basic plan without commercials to new US and UK users and phase it out for existing subscribers.

In the US, Netflix charges $6.99 per month for the ad tier, while its standard plan without commercials is priced at $15.49 a month. It has not raised the price of its standard plan since early 2022, while its ad-supported tier has been priced the same since its launch in late 2022.

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Operating in over 190 countries, Netflix is expected to report ad revenue of $242.7 million in the third quarter, according to the average of estimates from analysts compiled by LSEG. Overall revenue is expected to grow 14.3 per cent, a slightly slower pace than the previous three months, to $9.76 billion.

The streamer focused on live events, including sports, to attract more advertisers. Netflix aired the highly anticipated Jake Paul vs. Mike Tyson boxing fight in November, followed by its first NFL games in December. The second season of the hit South Korean drama series Squid Game, expected to release this month, could help the company draw subscribers in the last quarter of the year.