Netflix (NFLX) carries CFRA’s highest investment recommendation of 5-STARS, or “Strong Buy”. We see an enhanced buying opportunity with NFLX’s recent share price correction as both the screenwriter guild and actor union strikes were headwinds, explains Kenenth Leon, analyst at CFRA Research.

NFLX is the leading video streaming media company that offers subscription-based streaming of television episodes and movies to 238.4 million paid subscribers in more than 200 countries. NFLX sees higher revenue in 2H 2023 and raised its 2023 free cash flow forecast to $5.5 billion from $3.5 billion. We estimate total revenue at $34.0 billion in 2023 and $38.4 billion in 2024 as NFLX gains market share and revenue from the launch of adpay plans, advertising, and paid sharing plans.

A screen shot of a screen  Description automatically generatedNFLX is not only the largest video streaming provider, but it's also the only company that is highly profitable. The company does not face the current challenges that incumbent media companies face with the pivot to streaming from linear networks (broadcast and pay TV).

NFLX does not have to worry about cannibalizing its large customer base, since secular trends are favorable to video on demand streaming. The days of households wanting 500-1,000 cable channels are over, in our opinion.

In the US market, the ad-free premium plan is $19.99 monthly, the ad-free standard plan is $15.49, the ad-supported plan is $6.99, and the account sharing plan is $7.99. The password sharing crackdown is leading to a larger revenue source, whereby NFLX limits the number of extra member customers on account sharing to pay $7.99 monthly. The funds are used mostly for building new product.

We think the new ad-pay plans, with a 17%- 20% take rate for new member sign ups, is not seeing cannibalization of its higher priced ad-free paying members. In July, NFLX raised its 2023 free cash flow target by $1.5 billion to $5.5 billion from the prior $3.5 billion, versus $1.5 billion in 2022.

Additionally, with $8.6 billion in cash equivalents and $14.5 billion in long-term debt, the primary uses of cash include the acquisition, licensing, and production of content; marketing programs; streaming delivery; and employee-related costs.

Our 12-month target price is $520 using a forward TEV/EBITDA of 26.0x our 2024 EBITDA estimate at $9.26 billion, below the two-year historic average at 29.9x. We increased our 2023 EPS estimate by $0.45 to $11.85 and 2024's by $0.30 to $15.00. NFLX repurchased $1.0 billion of shares in 1H 2023 and has $3.4 billion outstanding on its $5 billion authorized plan.

Recommended Action: Buy NFLX.

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