Netflix priced to perfection: Barclays

Investing.com -- Barclays (LON:BARC) analysts raised their price target for Netflix (NASDAQ:NFLX) stock to $715 from $550 but maintained an Underweight rating, citing significant challenges for the streaming giant in meeting the lofty expectations embedded in its current valuation.

The new price objective reflects a valuation of 25 times its projected 2025 EBITDA of $12.9 billion.

According to the bank’s analysts, Netflix stock is trading at a premium level, "pricing in the best content cycle, a high multiple, and the maximum benefit from paid sharing and margin benefit from the strikes last year."

However, Barclays warns that sustaining this momentum will be difficult. “Now costs will step up, and ad growth will be a drag on pricing,” the analysts noted.

While pricing increases could act as a tailwind, the scale of their impact remains uncertain. The company has hinted that subscriber growth will primarily drive revenue in 2025, aligning with its strategy to balance growing ad inventory without increasing churn or diluting engagement.

“It is tough to see how estimates or multiples go up if growth is merely in line with the company’s guidance for next year,” analysts continued.

A key concern raised is Netflix's slow progress in scaling its ad-supported tier. Currently, only 9% of its subscribers use the ad-supported plan, compared to 30% at Disney+. This disparity is attributed to legacy media companies leveraging their established advertising infrastructure, a competitive advantage Netflix lacks.

Barclays also predicts continued pressure on CPMs as ad inventory grows across the streaming landscape, potentially limiting Netflix's advertising revenue growth.

Moreover, the report identifies limited opportunities for Netflix to boost valuation multiples further unless there is a shift in its market approach. “If advertising does become a bigger part of the mix, valuation multiples should also be a lot lower and more comparable to other ad-dependent peers,” the note stated.

Despite these challenges, Barclays acknowledged Netflix’s unique position in the sector, noting that “the optionality narrative in Netflix vs. other media names may continue to sustain its premium.”

Still, the firm emphasized the need for Netflix to exceed guidance to justify its valuation further.

“In order for the equity to keep working to grow into its valuation, either revenue growth or margins will have to come in better than company guidance,” analysts explained.