I have made the decision to downgrade Netflix from a buy to a hold due to its current overvaluation and potential challenges stemming from its password-sharing crackdown and the possibility of members trading down to the cheaper ad-supported tier. While Netflix has enjoyed high average revenue per user (ARPU) and improved free cash flow per share, which sets it apart from competitors, I believe it has reached a short-term peak.

Over the past year, Netflix has shown impressive gains, outperforming its sector, industry, and the broader market. However, with its stock price now surpassing the $400/share mark, it is a prudent time to secure profits. Netflix’s rally has resulted in an overbought Relative Strength Index (RSI) and a lofty valuation, which prompts my downgrade. Comparing Netflix’s valuation metrics to its peers in the streaming space reveals its relatively higher multiples for forward EV/EBITDA and GAAP P/E.

Nevertheless, Netflix’s significant advantage lies in its ARPU, which remains much higher than its competitors. While its recent ARPU growth has slowed, Netflix continues to report substantially higher domestic and international ARPU numbers. This, combined with its extensive content library, positions Netflix as an industry leader. However, I anticipate that Netflix will trade within the $350-400 range for the latter half of 2023 unless it surprises the market with strong performance in its ad-supported tier and avoids substantial churn from its password-sharing crackdown.

It is important to consider the uncertainties that lie ahead for Netflix, including the impact of a slow content slate, the growth of the ad tier, and the full rollout of the password crackdown strategy. Additionally, technical indicators, such as the overbought RSI, suggest that Netflix’s share price may face headwinds in the coming months.

While I remain bullish on Netflix’s long-term prospects, I am downgrading it to a hold for the short term. The upcoming quarters will provide crucial data that will shape the company’s future, including the release of highly anticipated original content and the effects of the password crackdown and ad-supported tier. Netflix’s ability to succeed in the ad tier and attract advertising partners will be a key factor in its future revenue generation. Despite the short-term challenges, Netflix has proven its resilience and remains a solid long-term investment, although locking in profits and considering reinvestment at potentially lower levels could be a wise move.