After being wiped out in the first half of 2022, shares of the streaming TV giant Netflix (NFLX 5.82%) they have seen some upward momentum recently. In fact, since 1 July, the stock has risen by about 25%. Of course, this gain still leaves the title far from where it was at the beginning of the year. Shares have fallen more than 60% since the start of the year.
An analyst of JPMorgan Chase he thinks the stock could continue to rise from here. There is increased investor interest in the stock ahead of the company’s imminent launch of its advertising business, Doug Anmuth said in a note to investors Wednesday. How far could the title rise? The JPMorgan analyst has a price target of $ 240 for 12 months for the stock, indicating that he believes there is still a significant upside for the streaming services firm’s shares going forward.
Headwind for subscribers
While it is encouraging to hear that Anmuth is betting that Netflix shares may increase its already impressive earnings from mid-summer, a price target of $ 240 specifically represents only a 7% upside from where the shares are trading at the time of trading. writing this article. The reason for Anmuth’s conservative outlook for the title? He believes there is uncertainty about how the company’s subscriber trends will add up in the second half of 2022. So while he’s optimistic about the potential of Netflix’s long-awaited ad-supported tier, headwinds to subscriber growth are holding many investors. aloof.
Second quarter subscribers declined sequentially for the second consecutive quarter, going from 221.6 million in the first quarter of 2022 to 220.7 million. Fortunately, Netflix led sequential growth in the third quarter, although the expected increase is anemic. Netflix drove for 1 million new members in the third quarter.
Until Netflix’s subscriber growth starts picking up speed, some investors and analysts may worry about the company’s long-term prospects.
Bet on ads
Fortunately, however, Netflix may soon be driving enough top-line growth from the launch of its ad-supported tier to help ease investor concerns about the company’s suppressed subscriber growth. Management said in its second quarter update that it plans to launch its first ad-supported tier early next year.
Investors are likely hoping that adding a new way for consumers to watch Netflix content will attract incremental revenue. Indeed, it is one of the key pillars behind management’s plan to accelerate revenue growth.
“While it will take some time to grow our member base for advertising level and associated advertising revenue, in the long run, we believe advertising can allow for a substantial increase in membership (through lower prices) and growth in revenue. profits (through ad revenue), ”Netflix said in the company’s second-quarter letter to shareholders.
Given Netflix’s short-term challenges with subscriber growth, Anmuth may be right to be cautious with its 12-month pricing target. But with the shares priced at just 19 times earnings as of this writing, investors may not fully appreciate the potential impact of a new advertising business next year. The shares may be more undervalued than Anmuth’s $ 240 price target suggests.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Daniele Scintille it has no position in any of the aforementioned securities. Its clients can own shares in the companies mentioned. The Motley Fool has locations and recommends Netflix. The Motley Fool has a disclosure policy.