Streaming giant Netflix, Inc. (NFLX) has benefited handsomely from COVID-19  pandemic tailwinds and its stock has surged 48.5% over the past year. The company added approximately 37 million memberships in its fiscal 2020. And this growth trajectory is expected to continue in 2021 because  NFLX has committed approximately $19.03 billion for original content production this year. The company expects its revenues to increase 7.3% sequentially in its fiscal first quarter, ending March 2021.

Netflix engages in the internet delivery of TV shows and movies directly on TVs, computers, and mobile devices in the United States and internationally. The company was founded in 1997 and is based in Los Gatos, California.

However, the entry of several companies in the streaming space is bringing stiff competition. NFLX still holds the title of the “most used streaming platform” in the world, owing to its widespread market reach and original production capacity.

Here’s what we think could drive NFLX’s performance in 2021:

Crackdown on Password Sharing

NFLX has been dabbling with the idea of implementing stricter impediments  to password sharing, which has been a fairly common practice with its service worldwide. According to research firm Magid, approximately 33% of all Netflix users share their account credentials. This translates to a loss of over $6 billion in revenues, according to Citi Bank analyst Jason Bazinet. NFLX’s password sharing loss is the largest among streaming companies, accounting for 25% of the total loss in revenues borne by U.S. streaming companies.

While a password sharing crackdown is expected to increase NFLX’s revenues with an increase in  its subscriber numbers, the company might face a slight decline in those numbers in the short term. With increasing competition in the streaming services space, some of its users may well  switch from NFLX to  an alternative provider  less stringent rules regarding password sharing.

Trading at a Premium Valuation

In terms of non-GAAP forward p/e, NFLX is currently trading at 51.50x, 134.8% higher than the industry average 21.93x. The stock’s trailing-12-month PEG ratio of 1.78 is 307% higher than the industry average 0.44.

NLFX’s forward price/sales and price/cash flow multiples of 7.56 and 570.52, respectively,  are significantly higher than  industry averages.

Consensus Ratings and Price Target Indicates Potential Upside

NFLX has an average broker rating of 1.57, indicating favorable analyst sentiment. Of  43 Wall Street analysts that rated the stock, 32 rated it Buy, nine rated it Hold, and two rated it Sell.

Analysts expect NFLX to hit $619.86 soon, indicating a potential upside of 13.2%.

POWR Ratings Reflect Uncertain Near-Term Prospects

NFLX has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

NFLX has a C grade for Value and Quality. NFLX’s trailing-12-month gross profit margin and ebitda margin of 38.88% and 18.81%, respectively,  are significantly lower than industry averages. This, coupled with the stock’s stretched valuation, justify its grades.

Of the 69 stocks in the F-rated Internet industry, NFLX is ranked #20. In addition to the grades we’ve  highlighted, one  can check out NFLX Ratings for Growth, Momentum, Stability and Sentiment here.

There are 10 stocks in the Internet industry with an overall rating of B. Click here to view them.

Bottom Line

NFLX has remained an investor favorite and part of the elite FAANG group for quite some time. However, given its relative overvaluation and potential short-term headwinds, we think investors should wait for a better entry point before investing in the stock.

The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

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NFLX shares were trading at $525.77 per share on Wednesday afternoon, down $9.32 (-1.74%). Year-to-date, NFLX has declined -2.77%, versus a 4.79% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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