Benchmark analysts have raised concerns about Netflix's (NFLX, Financial) overvaluation. In response to the stock's high price, the firm has maintained its "Sell" rating on NFLX with nearly 20% downside risk. Despite increasing the price target to $720 from $555 and citing hit programming like Squid Game and Stranger Things, the analysts warn investors of the stock's overvaluation.
While Netflix is continuing to outperform other media companies, Benchmark thinks the stock price is not sustainable on momentum, but not fundamentals. As Netflix's benefits from paid account sharing decline, the company's future growth is increasingly dependent on new initiatives – such as advertising supported video on demand (AVOD) and pricing strategies, the analysts said.
Netflix's innovative take on how to make content, with live sports and so on, was lauded by the firm. They noted the potential risks — including a highly publicized cooking show by Meghan Markle that could become a flop.
Compounding that concern for Benchmark is its valuation model, which expects Netflix to have 490 million subscribers in 2033 and has a 37 percent operating profit margin. This projection, on the basis of a high price to earnings ratio of 37x, is above the median price to earnings ratio of the Nasdaq 100 of 23.5x. But if tech stocks sell off, analysts caution, don't be surprised if Netflix's price follows suit.
