Netflix, Inc. (NASDAQ:NFLX) shares have come under pressure recently, and the weakness has prompted an analyst at Wedbush to upgrade the stock and take a neutral stance on it.
The Netflix Analyst: Michael Pachter upgraded Netflix from Underperform to Neutral, with a $342 price target. The analyst attributed the upgrade to the streaming giant's shares hitting Wedbush's $342 price target.
The Netflix Thesis: The recent weakness in Netflix shares shows investors' acknowledgement that the company will remain a low growth, extremely profitable enterprise in the long term, Pachter said.
Immediate share price appreciation is not in the cards, the analyst determined. That said, the company's "first-mover" advantage and large subscriber base give it a nearly "insurmountable" competitive advantage over its streaming peers, he added.
The company has reached saturation with respect to subscriber growth in the U.S. and Canada and is striving to lower churn, the analyst noted.
Related Link: Why This Analyst Thinks Netflix Can't Win Streaming Wars With Its Current Strategy
Pachter expects subscription price increases to fuel additional content production and growth in other regions. Future subscriber growth, the analyst said, will occur primarily in less developed regions at much lower subscription prices.
Content dumps, i.e. delivering all episodes of a new season at the same time, will increase churn, Pachter said.
"Netflix should deliver sustainable profit growth as long as it is able to continue raising subscription prices, but competition may create a price ceiling," the analyst said.
Netflix's competitors are continuing to spend handsomely on new content to bolster their own streaming services, the analyst noted. They are also cancelling licensing deals with Netflix, he added.
Walt Disney Co(NYSE:DIS) is the latest to retrieve content from the Netflix platform, taking back all the Marvel content that Netflix had licensed, Pachter said.
"Netflix offers subscribers a compelling value proposition for $15.49 per month, and we believe that the company has modest pricing leverage, with the ability to raise prices as high as $19.99 per month with few subscriber defections," the analyst indicated.
There is a catch with the move, as the higher the prices go, the more likely new subscribers will be to churn in and out, he added.
NFLX Price Action: At last check, Netflix shares were rallying 4.52% to $357.22.
Photo: Courtesy of Stock Catalog on Flickr
