Wedbush upgrades Netflix: 'Positioned to grow' amid 'Ozark,' 'Stranger Things' debuts

Wedbush upgraded Netflix (NFLX) from Neutral to Outperform, reiterating its price target of $280 a share.

In a new note published on Monday, analysts Michael Pachter, Alicia Reese and Junaid Zubair wrote that the streaming company "is positioned to grow," citing the staggered releases of "Ozark" and "Stranger Things."

"We think that Netflix is positioned to exceed its guidance for Q2, particularly because of the staggered release date for 'Ozark.'"

"While it is possible that the company will once again issue downbeat guidance for Q3, we think that the staggered release date for 'Stranger Things' will reduce churn, and once again, we think that Netflix is positioned to grow," the note read.

The analysts went on to say that they do not expect rapid changes at the company, explaining that the streamer will "only gradually raise prices and roll out its ad-supported option."

Netflix's upcoming ad-supported offering, in addition to its crackdown on password sharing, should help address its over-saturation problem in North America, with "great potential to drive significant revenue."

Wedbush estimates that an ad-supported model could generate as much as $10 per month per subscriber in ad revenues.

"On balance, we think ad-supported subscriptions is a good idea, particularly as a disincentive to churn."

Netflix joins other major platforms offering their own own ad-supported tiers to thwart subscriber cooldowns and lure paying users.

HBO Max (WBD), for example, launched its ad-supported offering last summer whereas Disney+ (DIS) announced that it would introduce a lower-price advertising tier this year.

Hulu, owned by Disney, has been running ads since 2007. The service reached nearly half of all connected TV households in the U.S. last year, according to Comscore.

Netflix's churn problem

Netflix's binge-able streaming model, although a big competitive advantage, has led to an increase in subscriber turnover.

According to Wedbush, Netflix lost 636,000 customers in the U.S. and Canada following a roughly 10% price increase. That reflects a "miss" of around 750,000 subscribers (compared to the consensus forecast for a gain of 150,000.)

"In our view, Netflix’s losses are primarily a result of its deep saturation in [the U.S. and Canada], with other options being more attractive to new subscribers once it decided to raise price," Wedbush said.

However, new content rollouts could underscore the platform's "commitment to reducing churn," thus increasing subscriber growth and investor confidence.

Wedbush applauded that company for taking "baby steps" to limit churn by splitting the seasons for both "Ozark" and "Stranger Things."

"In our view, this experiment will be a resounding success if expanded to all Netflix originals, and we believe the company will ultimately move in that direction."

The upgrade comes after Netflix's unexpected decline in Q1 subscribers, which led to a stock plummet of 35% and wiped more than $50 billion off its market cap.

Since then, the stock has struggled to rebound — down more than 68% year-to-date as investors question the longevity of the Netflix business model amid high inflation and increased competition.

For context, Netflix’s share price peaked above $690 (market cap of over $300 billion) in November 2021, before credit card data showed a slowdown in customer additions.

Wedbush, however, doubled down that a rebound is on the horizon, writing, "There is clearly significant upside to Netflix’s recent share price, which has consistently been below $200 as Netflix bulls have gone into hiding and bears have raised concerns about the impact of competition."

"With over 40% upside to Friday’s closing price, we find Netflix shares to be a compelling investment," the note continued.

Overall, Wedbush describes Netflix as an "immensely profitable, slow-growth company." The bank suggested that it should raise prices in its more mature markets (U.S, Canada) in order to increase profitability to reinvest in newer markets like Latin America and Asia.

Potential headwinds could include management woes with co-CEO Reed Hastings' track record of being "slow to accept change." Wedbush also said it's "skeptical" of the company's foray into video games, describing it as a "half-baked idea."

Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 or email her at alexandra.canal@yahoofinance.com

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