Netflix (NFLX) stock climbed in premarket trading on Tuesday after an analyst upgraded it as part of a broader realignment of his strategy on media stocks. The new strategy favors subscription-based media businesses over ad-focused firms due to the growing trend of ad avoidance among consumers. Before that upgrade, another analyst suggested there’s a relatively high probability we will see Apple (AAPL) buying Netflix.
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Netflix stock upgraded to Outperform
In a note on Tuesday, Macquarie analyst Tim Nollen said he has upgraded Netflix stock from Neutral to Outperform and set his price target at $220 per share. In addition to a subscription focus, he also favors firms with “scaled distribution with an international presence.”
Nollen believes that Netflix “changed the way people watch TV and notes that it is pushing even further into the film industry. He explained that consumers are taking steps to avoid advertising more and more, and this habit is causing them to shift to over-the-top streaming services.
How Netflix is driving improved revenue, earnings quality
Additionally, he likes the “improving quality” of the streaming firm’s revenues and earnings. He believes that the streaming firm is looking beyond what he describes as “the market’s obsession” with subscriber numbers by trying to improve its earnings and revenue quality.
He explained that the next round of subscription price increases is now beginning, which should improve the firm’s revenue quality. Further, he said the firm is expanding its distribution relationships with global cable TV providers and telcos and pushing international growth via local content. He also pointed out that Netflix is trying to reduce password sharing, which could increase its subscriber count even further.
He argued that the streaming firm is “actually being more judicious” about how much it spends on original content, contrary to the many headlines reporting that it’s willing to spend $20 million per original TV episode. Nollen believes Netflix can save money by spending less on licensed content.
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