New Netflix Rating, Sticking With This Price Target After Game Studio Update

Following our comments last week about Netflix (NFLX) shares and developments that spurred a re-think on our rating, we are lifting that rating to Two from Three while maintaining our $85 price target. In addition to the positive comments discussed about the company’s growing advertising business, we are also encouraged by reports that Netflix is continuing to focus on costs.

Those reports are about Netflix closing two video game studios as it looks to be “more focused on its execution.” The studio cuts leave Netflix with a central gaming team that works with external developers, and a dedicated first-party studio, Helsinki-based Next Games, which produced many of the company’s couch-centric party games.

We see this move lining up rather well with the business model Netflix has put in place for movies and other programming. But we also see the role of movies and shows as a very different one compared to the company’s games effort. While movies and shows drive subscriptions, because content is still king, games are more of a retention and engagement mechanism. Some may argue that you pay for the streaming content and get the games for free, but the reality is that gaming is a negligible driver of subscriptions. What we’ll look to see down the road is if Netflix expands its advertising efforts to include games, a move that would help offset game development.

Now, to one of the questions we’re likely to get as make this rating change:

Why didn’t we buy any more Netflix shares for the Portfolio on Monday?

We’ll give you two reasons. The first one ties back to our comments last week and in Friday’s Weekly Roundup about taking a more cautious position near-term. If you read our opening comments on Monday morning, you would be correct to think we are leaning even more cautious.

Second, after falling below the 50-day moving average, NFLX shares popped above it last week. Now we wait to see if the shares re-test that technical level at $74.74 and if it becomes a level of support or resistance. The answer will dictate our next move with NFLX shares.

One other question that we’re likely to hear is when might we revisit the current $85 target for NFLX shares, which is below the $94 consensus target.

We are collecting data for streaming market share against that for broadcast and cable TV viewing. What we’ve seen in the latest data, which only runs through May, is that streaming continues to take share from the others, hitting 48.6% of total TV viewing. Alphabet’s (GOOGL) YouTube remains the dominant player with about 14% share of total TV viewing, and Netflix is holding steady at around 8%.

As we get the streaming data from June and potentially July, that will give us a reason to revisit our NFLX target. We’ll also continue to monitor what’s coming soon to Netflix to determine if there is a breakout hit returning or a new one on the way.

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At the time of publication, TheStreet Pro Portfolio was long GOOGL and NFLX shares.