Netflix (NFLX) Stock Is a Winner, But Keep a Close Eye on Valuation

The coronavirus is here to stay. Well, hopefully not indefinitely, but for longer than anyone was expecting when it first began making headlines at the turn of the year. The recent surge in cases just as the economy was reopening means an additional stay-at-home period might be in the cards. In such a situation, what are we to do? Watch Netflix (NFLX).

That is the basis for the Netflix bull case from Monness analyst Brian White, who said, “Given the expansion of this COVID-19 crisis across a larger swath of the U.S., disrupting more states and further exasperating fears of a second-wave potentially returning to the hardest hit geographies later this year, there is a view developing that this pandemic will be with us longer than many first expected and we believe people will continue to tune into Netflix as a core source of entertainment.”

The 5-star analyst expects another strong showing, when Netflix posts 2Q20 earnings this Thursday (July 16). Although White doesn’t think Netflix will report the same record-breaking number of new subscribers as it did in Q1 – recall, Netflix added 15.8 million global accounts in the first quarter – he still predicts 7.5 million new additions, amounting to a year-over-year increase of 26%. Overall, White’s estimates are in line with the rest of the Street, expecting revenue to increase by 23% year-over-year to $6.05 billion (consensus calls for $6.08 billion) and EPS to come in at $1.81 – identical to the consensus estimate.

The downside is that White expects lower June quarter sales than usual. He forecasts a gain of 5% quarter-over-quarter, which is below the four-year average of 7% quarter-over-quarter growth.

Despite his expectation of lower sales, White reiterated a Buy rating along with a $500 price target. In line with recent trends, that price target is one Netflix has already surpassed on its way to a new high of $548.73. Therefore, the target indicates downside potential of 5%. (To watch White’s track record, click here)

Sentiment is similar across the Street. Based on 22 Buys, 9 Holds and 4 Sells, the analyst consensus rates Netflix a Moderate Buy. However, there’s downside potential of 12%, should the $480.55 average price target be met over the next 12 months. (See Netflix stock analysis on TipRanks)

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