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Shares of Netflix (NASDAQ: NFLX) have not done well this year and have tanked 68.3%. As the streaming giant gets ready to announce its Q2 results on July 19, will NFLX reach its 52-week high stock price of $700.99?

Wedbush analyst Michael Pachter believes that Netflix’s stock price is unlikely “to approach 2021 levels for many years.” However, the analyst continues to be bullish about the stock with a Buy rating. Let us look at the reasons behind analyst Pachter’s optimism.

Netflix Is Likely to Lose Fewer Subscribers

Netflix has forecasted revenues of $8.05 billion in Q2, up 9.7% year-over-year, while diluted earnings are expected to be $3 per share, compared to $2.97 for the same period a year ago. However, Wall Street analysts are expecting NFLX to generate revenues of $8.03 billion and diluted earnings of $2.96 per share.

Meanwhile, Pachter’s estimates suggest revenues of $8.13 billion in Q2, which is above the consensus estimates as the analyst expects Netflix to lose 1.5 million subscribers on a global basis. This is below Netflix’s estimate of global subscriber losses of 2 million.

According to Pachter, Netflix is likely to have driven “incremental viewership with Stranger Things 4 and likely limited churn by splitting up the content dumps between Q2 and Q3.”

The analyst added, “Given the strong viewership over the course of Q2, we think subscriber numbers will beat low expectations set by management.” What’s more, the analyst expects Netflix to forecast a gain in subscribers in the third quarter and anticipates its shares “to rally significantly.”

Pachter also elaborated on Netflix’s recent changes in its business model.

Netflix’s Crackdown on Password Sharing Households

Netflix announced in its Q1 earnings call that it was planning to crack down on password-sharing households. According to NFLX, around 30 million households in the U.S. and Canada (UCAN) and 100 million households globally are sharing passwords.

However, Pachter is skeptical about the 30 million figure, pointing out that Netflix has penetrated 75 million out of 130 million households in UCAN and, by his reckoning, “the addressable market (broadband penetrated households) is only around 110 million, meaning that only 35 million addressable households are not yet Netflix customers.”

The analyst added that there are at least 20 million households that neither watch television nor can afford Netflix, and as a result, the number of password-sharing households is more than likely to be around 15 million in this region.

Is Netflix’s Decision to Introduce an Ad-Supported Tier a Good One?

Another change that Netflix has made to its business model is the introduction of an ad-supported tier.

Pachter estimates that this ad-supported model could “generate as much as $10 per month per subscriber in ad revenues, based on comparable rates generated (on a per hour basis) by fuboTV, The Roku Channel, and Hulu.”

However, the analyst stated that this ad revenue is unlikely to be incremental “and Netflix would be required to offer a lower-priced monthly subscription in order to induce customers to sit through four minutes or more of advertising per hour.”

Pachter expects that this ad-supported model is likely to be priced at $6.99 per month and that 10% or more of Netflix’s 75 million customers in the UCAN are likely to opt for the ad-supported tier.

Wall Street Intent on Holding NFLX Stock

The analyst has a price target of $280 on the stock, implying an upside potential of 48.1% at current levels.

However, Wall Street analysts are sidelined about Netflix with a Hold consensus rating based on 10 Buys, 25 Holds, and six Sells. The average Netflix price target of $256.50 implies an upside potential of 35.6% at current levels.

Bottom Line

It remains to be seen how Netflix performs in Q2. However, the success of Stranger Things 4 and a change in its business model could augur well for the company.

Notably, Netflix’s website visits are not very encouraging right now. According to the TipRanks Website Traffic tool, total unique visitors on all devices were down 16.6% year-over-year in Q2.

Learn how Website Traffic can help you research your favorite stocks.

Disclaimer

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Undoubtedly, Netflix needs to pivot to regain its growth multiple. While the 73% slide has been violent, bringing the price-to-earnings (P/E) multiple in the 17 times range, I do think there are plenty of levers that CEO Reed Hastings can pull to get the fallen FAANG stock back on track.

For now, all eyes are set on Netflix with ads. Ahead of an economic slowdown, the service could have the potential to be a hit as consumers seek to save a bit of money where possible. I am bullish on Netflix.

Despite their size, FAANG stocks always find a way to leverage technological innovation to keep their growth rates alive. Now that the video-streaming market has matured, Netflix needs to expand into new frontiers.

Just as various members of the FAANG cohort have renamed their firms to mark a change in direction or a broadening of focus, Netflix needs to adapt or run the risk of dropping further.

Now, Netflix has already endured quite a hit to its multiple. At around 17x earnings, one has to think that the valuation reset is nearly concluded. With a headwind hurricane of higher rates, intensifying competition, and waning consumer budgets continuing to weigh on quarterly results, Hastings' job will not be easy.

Some of Netflix's streaming and media peers trade in the single-digit P/E range. Though Netflix is a far higher-quality content provider, it must find ways to distance itself from rivals if it's to command a premium. Like it or not, today's depressed multiple may not be depressed enough if Netflix can't pivot effectively.

Netflix Teams Up with Microsoft for Ad-Based Subscriptions

The Microsoft partnership on its ad-based subscription is just one intriguing lever that Netflix has pulled. Coincidentally, Microsoft is also the tech titan behind the "Netflix of gaming" service named Xbox Game Pass.

I think the Netflix-Microsoft partnership is one that could benefit both sides greatly. Further, if the partnership shows promise, it could act as a launchpad for other partnerships. Undoubtedly, a subscription that includes Netflix and Xbox Game Pass — the Netflix of games — could be a bundle that's impossible for consumers to pass up.

With Microsoft's acquisition of Activision Blizzard (ATVI) pending, a Netflix takeover seems doubtful at this juncture. In any case, partnerships may be key to helping both sides thrive in the fast-moving entertainment space.

As Netflix looks to double down in video games, Microsoft may be able to chime in at some point down the road.

Netflix with Ads Could Help Stock Fare Better in a Recession

It's hard to gauge how an ad-supported tier will affect coming quarterly results. Indeed, many of today's sticky, paying subscribers could embrace a lower-cost, ad-supported tier to save a few bucks.

Still, I think such a tier beckons many of the subscribers that canceled in the first half of 2022. Indeed, Netflix may not have had the strongest content slate in the first quarter of 2022. However, the primary driver of cancellations may be the overwhelming weight of inflation on consumer budgets.

The ad-based tier solves such an issue and could help Netflix win back its lost customers and then some as we inch closer to an economic slowdown.

Further, new content and the inclusion of more mobile games could help Netflix sweeten the pot for its users. In tough times, people still want to be entertained. They'll just be more selective with how much money they're spending to be entertained.

With hundreds of video games likely to come out of the Netflix pipeline over the coming years, the firm seems on the right track. It's willing to offer consumers more value rather than just seeking to target freeloaders and raise prices — moves viewed as hostile to certain consumers.

Wall Street's Take on NFLX

Turning to Wall Street, NFLX stock comes in as a Hold. Out of 41 analyst ratings, there are 10 Buys, 25 Holds, and six Sell recommendations.

The average Netflix price target is $258.58, implying an upside of 36.7%. Analyst price targets range from a low of $157.00 per share to a high of $400.00 per share.

NFLX's Smart Score Rating

Interestingly, NFLX has a 6 out of 10 Smart Score rating on TipRanks. This implies that it is likely to perform in line with the market and is in line with analysts' consensus Hold rating.

The Bottom Line on Netflix Stock

Netflix is in a world of pain right now, but there are reasons to believe that most headwinds have fallen into the rear-view mirror. The ad-based tier could help Netflix stock sail through the coming economic slowdown en route to much higher levels.

The Microsoft partnership is a big plus and could be the start of further mutually-beneficial relationships between the two entertainment heavyweights.

Disclosure

U.S. stocks closed sharply higher on Friday, ending several days of sell-offs with a rebound fueled by upbeat earnings, strong economic data and easing fears of a larger-than-expected interest rate hike by the Federal Reserve.

Wall Street stocks closed sharply higher on Friday, ending several days of sell-offs with a rebound fueled by upbeat earnings, strong economic data and waning fears of a larger-than-expected interest rate hike by the Federal Reserve.