Because Netflix’s advertising strategy could be a huge win for the business

Netflix (NFLX -7.78%) has been struggling for the past year. Ever since the company reported a loss of subscribers for the first time in more than 10 years, growing investors have downloaded the shares via streaming. Since the beginning of the year, its shares are now down 63% from S&P 500‘s drop of 17%.

But Netflix has a strategy to spur more growth and win back investors by introducing advertising-based plans. It’s not a move that everyone is a fan of; however, there are reasons why investors should be bullish on this pivot.

How could the advertising strategy be

By offering advertising-based plans, Netflix can offer consumers lower prices, potentially starting at $ 7 per month. It’s less expensive than its basic plan, which costs $ 9.99 today. With inflation still a major problem for the economy, consumers could opt for advertisements on their streaming services if that means cutting costs. And the new plans could arrive as early as November 1, in order to make the leap over the rival Walt Disneywhich will unveil its ad-based plans in December.

A recent article by The Wall Street newspaper highlighted some of the features of Netflix’s new advertising strategy and there are some promising features that could make it a big hit. Netflix knows its service is popular and out of the ordinary, according to an unnamed ad buyer, it’s looking for a high price tag for its ads: $ 65 CPM (cost per 1,000 impressions). Advertising rates can vary greatly depending on the medium, starting at $ 10 for regular TV ads. At $ 65, Netflix is ​​definitely on the high end of the range, at least initially. But given the popularity of its service, you probably don’t need to distribute ads at a discount. By making big bucks for its money, the tech company might not even have to resort to having to flood its content with ads to boost sales. Netflix is ​​also reportedly not trying to depend too much on a single brand, trying to limit its annual spending to $ 20 million.

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With ads now part of the viewing experience, viewers may be concerned that the service may become similar to traditional cable. However, Netflix is ​​also reportedly trying to ensure that there are only four minutes of ads per hour, much less than cable TV, where there can be five times as many ads during the same period.

The gain may not be significant, at least for now

Netflix hasn’t finalized its strategy, but early signs are encouraging it’s not flooding its content with advertising. For consumers, this can make ad-based plans more of an option.

And as for what it could mean for the company in terms of revenue, at the low end, Netflix could generate at least $ 1.2 billion more in annual revenue by 2025, according to one estimate. That would be less than 4% of the $ 31 billion in revenue the company has recorded in the past 12 months.

It’s not a huge amount; however, with Netflix also cracking down on account sharing, it could also lead to higher subscriber numbers. And if the advertising business goes well, it wouldn’t be surprising to see the company offer multiple advertising-based plans.

Are Netflix shares a purchase?

With a price-to-earnings ratio of just 20, Netflix is ​​cheap compared to the average tech stock, which averages a multiple of over 25. Plus, with Netflix now focusing more on cost reduction than ever before, its profitability it could improve, making its valuation even more attractive than it is today.

Overall, the moves Netflix is ​​making right now should set it up for great results in the future. While the stock is struggling, buying it could be an excellent move for long-term investors.

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David Jagielski it has no position in any of the aforementioned securities. The Motley Fool has locations and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: January 2024 long calls $ 145 on Walt Disney and January 2024 short calls $ 155 on Walt Disney. The Motley Fool has a disclosure policy.

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