Netflix and its peers are set for a ‘return to growth,’ analysts say, giving one stock 120% upside

Published Wed, Jul 20 20228:00 PM EDTUpdated Thu, Jul 21 20222:22 AM EDT

Netflix surprised markets in a good way on Tuesday, with less bad news than some investors had been fearing. The streaming giant said it lost nearly 1 million subscribers in the second quarter — far short of the 2 million it earlier warned it could incur. It comes after Netflix, along with other streaming stocks, plummeted this year — in line with the massive sell-off in tech stocks. But have these media stocks bottomed? It's been a mixed bag: Some analysts have in recent days been more optimistic, while others have cut targets on Netflix. 'Return to growth' While the loss of subscribers was smaller than expected, Beth Kindig, lead tech analyst at I/O Fund, said the "bigger news is that [Netflix is] planning to return to growth," given that the stock is at "rock bottom." The company, which currently has 220.67 million subscribers, said it expects net additional subscribers to reach 1 million in the third quarter. That plan "is absolutely paramount right now because the valuation is so low, it's at a historic 10-year low both top line and bottom line. So any return to growth and that low valuation comes into the picture where we might start to see buyers," she told " Squawk Box Asia " on Wednesday — after the earnings report. Netflix shares have plunged over 60% year-to-date. Other plans it has to reinvigorate growth include launching an advertising-supported product in 2023, and cracking down on password-sharing. "The streaming sector has faced tough comps following Covid and we believe the market is confusing a slowdown for something more inherent rather than a transient headwind that Covid created," Kindig told CNBC. Comps refers to comparable company analysis, a way of determining the value of companies by measuring them against their peers. "These comps clear in H2 2022 and beyond, so we expect a return to growth for streaming stocks and we believe the current valuations are an overreaction to the downside," she said. Investment firm Guggenheim said in a July 18 note that Netflix earnings have "wide-ranging implications" for not just the stock, but also the valuations of its streaming peers. Netflix's membership trends for the second and third quarters will be "the most critical" component for value, said the firm, which put out a buy call on Netflix and a $265 price target from its last close of $216.44. Its target reflects its view of Netflix's additional economic value from the launch of its new advertising-supported product and global growth, it said. Citi, in a note after the earnings announcement, also reiterated its buy call on Netflix, and has a price target of $275. Still, not everyone is bullish. Credit Suisse analyst Douglas Mitchelson told clients on Monday — before the earnings were out — that Netflix's long-term outlook is uncertain. "Its minimal [free cash flow] generation hinders taking a value stance on the shares, while a substantial rebound in subscriber growth in future quarters will require some combination of faster marketplace growth, viral content success, and lack of competitive impact — each of which is uncertain at this point," he said. Stock picks Investors can also consider buying American streaming platform Roku , according to analysts. Kindig recommends Roku because of the trend of ad-based video on-demand, a model that requires users to watch advertisements before viewing free content. "I would say it's the number one investable trend in media," she told CNBC, adding that the video ads for streaming services can be monetized much more easily, as well as draw advertisers of higher quality. As top advertisers are able to access data in order to target the right users, they will start investing more in streaming services like Roku and Netflix. She also recommends online advertising tech firm Magnite . Asset manager Needham in a July 18 note also flagged Roku's potential revenue stream from data. It estimates that selling user data derived from its first-party connected TV viewing service — devices built into TVs to support streaming — would add nearly 3% to revenue and 30% to its Ebitda (earnings before interest, taxes, depreciation, and amortization). Needham has a price target of $205 on Roku, representing more than 120% upside. Roku has also plummeted over 60% year-to-date. — CNBC's Samantha Subin contributed to this report