'Squid Game's' next season will be a huge success for Netflix: Analyst

Tuna Amobi, CFRA Research Analyst joins the Yahoo Finance Live panel to discuss Netflix.

Video transcript

[NO SPEECH] - And our next guest says that the upside is much more likely than the downside. He has a price target of $725 on the stock. He sees some upside. Tuna Amobi, CFRA research analyst, joins us once again.

And, Tuna, good to be chatting with you. The optimism here, fueled by a lot of, what I don't think anyone in the world, and I do say world, saw coming is the breakout of "Squid Game." But how much is that really going to add maybe to what could be, in your eyes, an upside surprise on the subscriber number.

- No, absolutely, I think, you know, Zack, you can almost sense some palpable excitement with this accidental hit in "Squid Game." My sense is that they've got something really special going here, based on all the information that we have.

So I think, as you alluded to, we think that there is definitely some upside to the 3.5 million guidance. Granted, that they had some really very, very robust numbers in the prior year, which, as we've seen this slowdown, thus far this year.

So kind of looking forward, I think investors are going to be focusing mostly on a Q4 guidance and the potential tailwinds that will enable the company to accelerate into next year, which is kind of why we have the buy recommendation, a 12-month target of 7.25.

I think what has happened to Netflix is that, as you know, the stock really started up, you know, the year really soft. We've seen a significant recovery in the last two or three months with more and more excitement. So I think going forward with the content pipeline now pretty strong, as strong as we've seen it, with new shows in the second half of this year, fourth quarter, I think really all of the stars seem to be aligning for a resumption of what I might call the post-pandemic normalized level of growth. Nothing that of the like in the prior year, but something more sustainable going forward.

- Tuna, do you think the success of a show like "Squid Game," which only cost $21 million, roughly, to make. Does that change the calculation for Netflix? Or maybe other streaming sites who are looking at the explosive growth they have seen or the popularity they've seen?

I mean, those internal documents that Bloomberg reported on values this at $900 million. I'm not sure how they reach that number, but that seems to be significant upside for an international show that didn't cost a whole lot of money.

- Indeed, Akiko, I think we've covered the industry long enough to see, to know that you sometimes, you always have this kind of extraordinary shows or impact that really tremendously move the needle.

We don't-- we're not so sure about a $900 million impact value. But that being said, it's pretty clear to us that this is a show that's going to have a tremendous impact.

And more importantly, I think, coming at a time where Netflix is really trying to evolve their video game strategy. The timing couldn't be more fortuitous, frankly. I think you can almost envision video game adaptations and all kinds of things they could do with this.

So I think more likely than not, Akiko, they've got a franchise on their hands. They've already talked about a season two, no surprise there. And I think we can all agree that it's going to be an extremely profitable franchise for the company.

- Yeah, and I guess, Tuna, when we focus in on what else investors look to, you know it's been kind of a weird time. Last time we were talking and trying to match the free cash flow profiles of Netflix and quarter-to-quarter, because of what the pandemic did for production costs and really sagged those, brought those down. I mean, as we get back to normal, does that maybe matter as much anymore when we think about where Netflix's cash position is and how they've been able to maybe right the ship?

- It does matter a whole lot, Zack, and a lot of investors I speak to are really getting excited about this inflection the company is going to experience. Free cash flow. Break even this year, likely to accelerate next year.

The idea that they're spending this year north of $17 billion of content in cash spending, and still be able to break even free cash flow, I think that's remarkable. And the idea also that they are now self-funding removes another layer of worry for equity investors.

So I think the free cash flow profile, Zack, undoubtedly is going to be become more positive. And it's going to make a lot of investors become more constructive. Granted, the valuation reflects quite a fair amount of that right now, but if you believe the secular story and the under-penetration in international markets-- Asia-Pacific, for example, it's still like 10% penetration-- the runway is huge. And that's really what I think is going to be the main driver of the thesis going forward.

- We'll be watching when we get that report after the bell. But, for now, Tuna Amobi, CFRA research analyst. Always love having you on, man.