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Netflix shares have doubled since May, but one analyst says still ‘too early to buy’

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Netflix (NFLX) shares closed Friday’s session 8.5% higher after the company reported better-than-expected quarterly subscriber additions.

With Friday’s close at $342.50 a share, Netflix has more than double from its May 2022 low of $166.37. However, the stock is still off roughly 50% from its record high of $690 a share reached in November 2021.

And as analysts and investors turn bullish amid new profitability initiatives like a crackdown on password sharing and a recently launched ad-supported tier, one industry watcher is warning there’s still much more the company needs to prove to investors.

“We think it’s too early to buy NFLX,” Needham’s Laura Martin wrote in a new client note on Friday.

The analyst listed several concerns for the company in 2023, including elevated churn over the next two quarters amid its password sharing crackdown, in addition to more consumers trading down to the cheaper, ad-supported plan due to the price increases.

Martin stressed minimizing churn will be paramount for all streaming companies in 2023, and represents the biggest risk for Netflix. Especially as its daily engagement rate of roughly 2 hours per day lags competitors like Roku (ROKU), which boasts an average engagement rate of 4 hours per day.

Netflix acknowledged increased churn levels while testing the password-sharing crackdown in Latin America, but noted engagement steadily increased over time as borrowers signed up for their own accounts and new content was released.

Martin also called out Netflix’s admission that advertising revenue won’t be meaningful in 2023. Instead, the company described the initiative as a long-term effort.

“It’s a multi-year path,” CFO Spencer Neumann told investors on the earnings call, going so far as to say Netflix’s ad business could eventually be larger than Hulu’s.

“We’re not going to be larger than Hulu in year one, but, hopefully, over the next several years, we can be at least as large,” he said. Neumann added the goal is for Netflix is for advertising to be, “bigger than at least 10% of our revenue and hopefully much more over time.”

Still, Martin argued that’s not enough to justify buying shares at current levels, stating bluntly: “We believe current 2023 estimates and valuations are too high for NFLX.”

“From a valuation point of view, we worry that NFLX’s multiple is too high as its growth principally relies on price increases,” the analyst said. “That is, sub ads have been decelerating every quarter for the past 6 quarters, reaching 4% year-over-year growth in 4Q22.”

“Therefore, to reach double-digit revenue growth from now on, the company must raise prices by 6% to 8% per year, depending on [foreign exchange], even in recession years,” Martin added, cautioning a long and bump road is likely ahead for the streaming powerhouse.

Netflix Co-CEO Ted Sarandos attends a screening for the documentary

Netflix Co-CEO Ted Sarandos attends a screening for the documentary “The Redeem Team” in Los Angeles, California, U.S. September 22, 2022. REUTERS/Mario Anzuoni

Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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