This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
After getting annihilated in the first half of 2022, shares of streaming-TV giant Netflix, Inc. (NASDAQ: NFLX) have seen some upward momentum recently. Indeed, since July 1, the stock has risen about 25%. Of course, this gain still leaves the stock far from where it was at the beginning of the year. Shares are down more than 60% year to date.
An analyst from JPMorgan Chase thinks the stock could continue to rise from here. There's increased investor interest in the stock ahead of the company's upcoming launch of its ad business, Doug Anmuth said in a note to investors on Wednesday. How far could the stock rise? The JPMorgan analyst has a $240 12-month price target for the stock, indicating he believes there's still meaningful upside for the streaming service company's shares ahead.
Subscriber headwinds
While it's encouraging to hear that Anmuth is betting Netflix stock can add to its already-impressive gains since the middle of this summer, a $240 price target notably only represents 7% upside from where shares are trading at the time of this writing. The reason for Anmuth's conservative outlook for the stock? He believes there's uncertainty surrounding how the company's subscriber trends will add in the second half of 2022. So even if he's optimistic about the potential for Netflix's long-awaited ad-supported tier, headwinds to subscriber growth are keeping many investors on the sidelines.
Second-quarter subscribers fell sequentially for the second quarter in a row, declining from 221.6 million in the first quarter of 2022 to 220.7 million. Fortunately, Netflix guided for sequential growth in Q3, though the expected uptick is anemic. Netflix guided for 1 million new members in Q3.
Until Netflix's subscriber growth starts to pick up some speed, some investors and analysts may worry about the company's long-term prospects.
Betting on ads
Fortunately, however, Netflix may soon drive enough top-line growth from the launch of its ad-supported tier to help soothe any investor concerns about the company's suppressed subscriber growth. Management said in its second-quarter update that it expects to launch its first ad-supported tier early next year.
Investors are likely hoping the addition of a new way for consumers to watch Netflix content will attract incremental revenue. Indeed, it's one of the key pillars behind management's plan to reaccelerate its revenue growth.
"While it will take some time to grow our member base for the ad tier and the associated ad revenues, over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth (through ad revenues)," Netflix said in the company's second-quarter letter to shareholders.
Given Netflix's near-term challenges with subscriber growth, Anmuth may be right to be conservative with his 12-month price target. But with shares priced at just 19 times earnings at the time of this writing, investors may not be fully appreciating the potential impact of a new ad business next year. Shares may be more undervalued than Anmuth's $240 price target suggests.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
