Liam Daniel/Netflix
- Netflix is overvalued and could tumble 37% in the next year, says Wedbush.
- Analysts are concerned about the streaming giant's ability to generate free cash flow upwards of $1 billion.
- Wedbush anticipates a ramp-up in content spending could weigh on Netflix's profits.
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Netflix is overvalued and the shares could tumble in the next year, according to a team of Wedbush analysts led by Michael Pachter.
Wedbush has an "underperform" rating for Netflix and price target of $340, representing a roughly 37% drop from current levels. In a recent note the analysts said they are more constructive about Netflix now than they've been at any point in the last decade, but they continue to question its valuation and ability to generate free cash flow of more than $1 billion per year.
"Netflix has executed extremely well during the pandemic, surprising us by keeping its foot on the gas pedal for subscriber growth, while benefiting from a disruption in content production schedules that allowed it to generate positive free cash flow," said the analysts.
But they anticipate Netflix will only break even in free cash flow during 2021, and their models show that the company has an enterprise value of $162 billion, far below current levels.
"We had long believed that Netflix faced a difficult path to positive free cash flow, but its performance in 2020 convinced us that we were wrong. The company managed its production spending in a very difficult environment, and while conserving cash and generating $1.9 billion of positive free cash flow in 2020, Netflix still managed to add a record number of new subscribers.
Netflix crushed Wedbush's expectations in 2020, generating $1.9 billion of positive free cash flow and adding a record number of new subscribers, all while managing its production spending in a pandemic. Shares gained nearly 64% in 2020 but have remained relatively flat in year-to-date.
The analysts now expect Netflix to spend much more on content, and breakeven in cash flow for 2021.
Shares of Netflix were up 2.3% Thursday.