The Stock of Netflix Reflects Too Much 'Euphoria' as Hollywood Strikes Linger, Says an Analyst

According to Benchmark Research analyst Matthew Harrigan, Netflix Inc. holds a relatively favorable position in the industry despite ongoing strikes by writers and actors. However, Harrigan believes that the current stock value reflects excessive optimism. Netflix shares are trading significantly above their moving averages, with a 36% increase above the 200-day moving average and a 27% increase above the 50-day moving average. Year-to-date, the stock has risen by 53% and has seen a 136% increase over the past 12 months.

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Harrigan notes that although Netflix has advantages such as a robust inventory of new content and significant overseas production not affected by the U.S. labor shutdown, prolonged strikes could potentially dampen the company's growth in 2024. He highlights the escalating level of acrimony between the striking parties, citing resistance to high executive pay within the entertainment industry and the unfortunate timing of the Sun Valley Allen & Company retreat coinciding with images of picket lines outside studio gates.

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If the strike resolution requires studios to increase compensation for streaming-related residuals to writers and actors, Harrigan believes that all studios will feel an impact. However, Netflix could be particularly affected due to its role as a key driver for the absence of residuals in streaming compared to traditional linear formats. Moreover, Harrigan points out that unlike many of its competitors, Netflix lacks live sports or news programming, which could be a disadvantage in extended strike scenarios.

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Harrigan has raised his price target on Netflix shares from $250 to $293. The impact of the strikes on Netflix's business is expected to be addressed when the company releases its second-quarter earnings after the closing bell on Wednesday.

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In a similar vein, Wells Fargo analyst Steven Cahall commented that Netflix shares appear to be priced to perfection ahead of earnings, with high expectations from the buy side. However, Cahall believes that long-term investors may not be deterred by any perceived earnings disappointment relative to these high expectations. He suggests that although the stock may initially experience a decline in response to the results, it is likely to rebound as the third quarter progresses. Cahall maintains an overweight rating on Netflix's stock and sets a target price of $500.

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