Netflix stock could surge 17% as it sees early success in its low-cost ad tier and paid sharing rollout, JPMorgan says

• Netflix stock has more upside as it sees early success in its low-cost ad tier and paid sharing rollout, JPMorgan said.

• The bank increased its price target for the streaming company to $470 from $380 in a Wednesday note.

• "We believe there is further upside as Netflix executed on paid sharing and estimates move higher," JPMorgan said.

Netflix stock has surged 37% so far this year, and JPMorgan believes the gains can continue as the streaming company sees early success in its low-cost advertising plan and paid sharing rollout.

In a Wednesday note, the bank reiterated its "Overweight" rating on the stock and raised its price target to $470 from $380, representing potential upside of 17% from current levels.

JPMorgan boosted its earnings estimates for Netflix to capture its potential monetization of the estimated 100 million households that use Netflix but don't pay for it by sharing passwords.

And while Netflix's February announcement of its intention to crackdown on paid sharing caused an uproar with consumers and ultimately led the company to delay its rollout, the rollout of the program, which nudges users to pay for sharing passwords or else encourage those using someone else's account to pay up, has seen less outrage from consumers. That's a good sign, according to JPMorgan.

"Netflix has improved communications with sharers and borrowers and eased concerns related to access while traveling... global data from Sprinklr and Google Trends suggests there has been less noise around the recent broader rollout than the four markets in February," JPMorgan analyst Doug Anmuth said.

Anmuth expects 33 million households that share passwords to be converted into paying customers by the end of 2025, according to Anmuth, with about a 50/50 split between new subscribers and extra members, in which a household pays more money to share their password with someone else.

A successful paid sharing rollout, combined with solid traction in Netflix's low-cost advertising plan, gives Anmuth confidence to raise his revenue estimates by 4% and 6% in 2024 and 2025, respectively, and increase his operating income estimates by 6% and 9%. Those higher revenue and profit estimates point to a higher stock price estimate for Anmuth.

"We recognize Netflix shares are up 17% since the Upfronts [presentation], but we believe there is further upside as Netflix executes on paid sharing and estimates move higher," Anmuth said.

The rest of Anmuth's bull case for Netflix hinges on profit margin expansions driven by faster revenue growth and tighter cost discipline, an improvement to the company's free cash flow driven by a decline in content spending, and the company's leadership position in an "increasingly rational streaming industry."

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