Buy Netflix stock as its password sharing crackdown could help drive 27% upside, JPMorgan says

• Netflix's coming crackdown on password sharing could drive a lot of upside in its stock price, according to JPMorgan.
• The bank said recent pushback on Netflix's password sharing plans will likely push back the rollout to the second quarter.
• "Regardless of the exact timing, we expect Netflix to continue down the path of transitioning users away from widespread account sharing."

Netflix is about to crackdown on its users sharing their passwords, and that could drive substantial upside in its stock price over time, according to JPMorgan.

The bank said in a recent note that investors should stay "overweight" the streaming giant and buy any pullbacks in the stock price, setting a $390 price target, which represents potential upside of about 27% from current levels.

While there was an uproar from its userbase earlier this year when it divulged its password sharing crackdown plans, the problem is too big of an opportunity for Netflix to ignore, with the company estimating that more than 100 million households are watching Netflix without paying for it.

"There is growing concern that early friction could delay or stagger the rollout, pushing it deeper into 2Q and beyond," JPMorgan said.

Netflix indicated that it would roll out its password sharing crackdown in the first quarter, but that timeline has likely been pushed into the second quarter, the bank said. The company plans to allow users to pay extra to let people outside of their physical household to access their account.

While the noise related to the password sharing rollout could drive near-term volatility in Netflix's stock price, JPMorgan admits, it will still help drive monetization of its platform over the long-term, making any short-term sell-offs a buying opportunity for investors.

"Regardless of exact timing, we expect Netflix to continue down the path of transitioning users away from widespread account sharing, making select policy and customer service tweaks along the way to reduce friction. Ultimately we expect Netflix to generate more revenue through the combination of Extra Members and new standalone accounts, especially as Paid Sharing is paired with the low priced basic with ads tier," JPMorgan said.

The bank offered three reasons why it remains bullish on Netflix stock going forward.

1. "Solid content, advertising, and paid sharing should drive accelerating revenue growth through 2023."

2. "Operating margins expand due to faster revenue growth and tighter cost discipline."

3. "Free cash flow ramps on improving profit & stable cash content spending."

Also a benefit to Netflix is its large scale as its streaming competitors reduce their content spending plans amid an investor focus on profits over growth, according to the bank.

"Importantly, as the streaming industry becomes more rational, we believe Netflix benefits through its strong scale, industry-leading position, and 20%+ operating margins," JPMorgan concluded.