Netflix's Q3 Report Impresses Analyst, Leading to Rating Upgrade by Morgan Stanley

Morgan Stanley's Benjamin Swinburne upgraded their rating on Netflix (NASDAQ: NFLX) from Hold to Strong Buy on October 19, 2023. The analyst also raised their price target by 10.5% from $430 to $475.

Explaining the reasoning behind the upgraded rating and increased price target, Swinburne highlighted concerns that had previously led to a Hold rating. According to Swinburne, Morgan Stanley's prior view was based on concerns that consensus expectations for Netflix's new growth drivers - paid sharing and advertising - were too high. However, the analyst noted that since the stock's climb to $475 after Q2's print in July 2023, both those estimates and the stock's price have declined. Swinburne added that sentiment around the advertising opportunity, in particular, has soured, causing rising anxiety among investors.

Nevertheless, a read of Netflix's Q3 2023 earnings report indicated to Swinburne that the company's business has been accelerating, the paid-sharing initiative is working, and competitors have pulled back. As a result, Morgan Stanley has regained confidence in Netflix's ability to deliver on its objectives of accelerating revenue growth back to double digits and expanding margins, as set out a year ago.

Netflix's Q3 2023 earnings report revealed an EPS of $3.73, which beat the Zacks Consensus Estimate by 7.8% and Q3 2022's earnings by 20.3%. The company's revenue for the same period was $8.542 billion, surpassing the Zacks Consensus Estimate by 0.11% and Q3 2022's revenue by 7.8%.

Looking ahead, Netflix's management has guided an EPS of $2.15 for Q4 2023 and revenue of $8.692 billion. For the full year 2023, the company expects free cash flow of $6.5 billion, up from the prior guidance of at least $5 billion, and an operating margin of 20%, which is at the high end of the prior 18% to 20% guidance. In addition, Netflix has projected an operating margin of 22% to 23% for FY 2024.

Despite facing challenges in the industry, including strikes by writers and actors in the US, Netflix remains committed to resolving these issues as quickly as possible. The company aims to ensure that everyone can return to work and produce movies and TV shows that audiences will love, as stated in its Letter to Shareholders.

Morgan Stanley's upgraded rating and price target increase for Netflix on October 19, 2023, were not the only analyst actions on the stock. Barton Crockett of Rosenblatt raised their price target by 1% from $400 and maintained a Hold rating on the stock. Matthew Thornton of Truist Securities raised their price target by 8.1% from $430 and upgraded their rating on the stock from Hold to Strong Buy. Doug Anmuth of JP Morgan raised their price target by 5.5% from $455 and maintained a Strong Buy rating on the stock.

Overall, 75% of top-rated analysts currently rate Netflix as a Strong Buy or Buy, while 25% see it as a Hold. No analysts recommend or strongly recommend selling the stock.

The consensus forecast among analysts is that Netflix will deliver earnings per share (EPS) of $11.63 in the upcoming year. If these analysts' predictions hold true, Netflix's next yearly EPS will be up by 21.9% on a year-over-year basis.

In terms of stock performance, since Netflix's latest quarterly report on October 18, 2023, the stock price has risen by 16.1%. Year-over-year, the stock has seen an impressive increase of 47.5%. During this period, Netflix has outperformed the S&P 500, which has gained 14.3%.

Benjamin Swinburne, the Morgan Stanley analyst who upgraded Netflix's rating, is ranked in the top 4% of Wall Street analysts by WallStreetZen. With an average return of 9.1% and a win rate of 53.1%, Swinburne specializes in the Industrials and Technology sectors, among others.

Netflix, Inc. is a leading provider of entertainment services, offering TV series, documentaries, feature films, and mobile games across various genres and languages. The company provides streaming content to its members through a range of internet-connected devices and also offers DVD-by-mail membership services in the United States. Currently, Netflix has approximately 222 million paid members in 190 countries. The company was incorporated in 1997 and is headquartered in Los Gatos, California.

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