Netflix stock was downgraded by one analyst and upgraded by another on Monday, 10 days before the streaming company reports third-quarter earnings.
Netflix stock has gained 48% this year, and that increase has helped push its valuation higher. Shares are now trading at 32.6 times the earnings expected over the next 12 months, which is higher than the S&P 500’s 21.7 times.
Barclays analyst Kannan Venkateshwar wrote in a research note on Monday that the stock’s valuation is based on the assumption that Netflix’s revenue growth will remain in the low double digits for the foreseeable future.
“Even if the company gets to its revenue growth goal, valuation is implicitly pricing in more than a doubling of sub [subscriber] base from present levels,” Venkateshwar wrote. He downgraded shares to Underweight from Equal Weight while maintaining a target of $550 for the price.
Netflix introduced major changes to its business model last year. This included putting restrictions on password-sharing, which forced people using someone else’s account to create their own profiles if they wanted to keep watching Emily in Paris and The Great British Baking Show.
The company then introduced a less expensive ad-supported tier and a more expensive ad-free plan. These moves, along with price increases, have been successful. Netflix said in July that its second-quarter subscriber count grew 16% to 277.7 million global memberships, beating Wall Street estimates.
However, Venkateshwar argues that Netflix’s growth is slowing, which makes its valuation too expensive. He wrote that it is difficult to see subscriber growth remaining anywhere close to what it has recently been, as “paid sharing more than likely pulled forward some growth.”
Not everyone on Wall Street agrees. Piper Sandler analyst Matt Farrell upgraded shares of Netflix to Overweight from Neutral while increasing his price target to $800 from $650. He wrote in a research note that his previous Neutral rating was based on the stock’s high valuation.
“But now, we appreciate the company is expensive for a reason,” he wrote.
After the jump in subscribers due to the implementation of the password-sharing restrictions, Farrell believes, the company doesn’t need to see the same levels of subscriber growth for revenue to increase by double digits. Netflix has raised prices, and that pricing power could help revenue growth stay strong, he said.
Shares of Netflix were down 0.6% to $715.49 on Monday, while futures for the S&P 500 declined 0.5%.