Netflix shares were a big winner during the first year and a half of the Covid-19 pandemic as consumers took shelter in place and relied on its video streaming service for entertainment. Now, faced with the decline in subscribers amid high inflation and intense competition, Netflix (NFLX) hopes a new level of ad-subsidized service will put it back on the path to growth.
But Wall Street is divided on the prospects for a cheaper, ad-based level of service.
Some analysts think Netflix could grow rapidly to become a major player in the ad-supported video on demand market. But others think it will cannibalize its existing service as subscribers transition to the new low-priced advertising layer.
Netflix plans to launch its ad-supported service on November 1 and charge between $ 7 and $ 10 per month, according to the news. Its standard ad-free streaming service costs $ 15.49 per month.
Meanwhile, rival Walt Disney (DIS) plans to debut its ad-subsidized Disney + Basic service on December 8 for $ 7.99 per month.
Aim for 40 million ad viewers in the first year
Netflix is telling ad shoppers it expects to reach approximately 40 million viewers globally for its ad-supported tier by Q3 2023, the Wall Street newspaper reported. In addition, it expects to have 4.4 million viewers for the service by the end of this year, including 1.1 million in the United States.
The metric shared by Netflix, “expected unique viewers”, will be higher than the number of subscribers to the new service due to the fact that more people in each household are using it.
KeyBanc Capital Markets analyst Justin Patterson is skeptical of Netflix’s subsidized service prospects.
To reach 40 million viewers in a year, Netflix would likely cannibalize its premium, ad-free subscription business, it said in a note to customers. And that “would raise the question of whether ad revenue could increase margins in the first year,” she said. Patterson views Netflix shares as an industry weight or neutral.
Opportunity to attract previous subscribers
Oppenheimer analyst Jason Helfstein is optimistic about Netflix’s ad-supported level. He thinks it will accelerate subscriber growth and slow abandonment for the company.
“Netflix is uniquely positioned to aggregate large audiences and control series launch times for top-tier advertisers,” Helfstein said in his customer note. It should also be able to command high ad rates, she said.
While Netflix’s subsidized service will attract some first-time subscribers, the biggest opportunity is to re-engage customers who left Netflix, Helfstein said.
Helfstein predicts Netflix will generate global advertising revenue of $ 4.6 billion in 2025, bringing total revenue to $ 42.4 billion. Furthermore, he thinks Netflix will reach 282 million total subscribers in 2025.
Helfstein rates Netflix shares as outperforming with a price target of 12 to 18 months 325.
Netflix collapses on the stock market
Netflix shares have plummeted since reaching an all-time high of 700.99 last November. The regular session ended on Thursday at 237.05.
If successful in its new venture, Netflix could take a large chunk of the ad dollars that go to linear TV services today, including broadcast and cable networks, Wells Fargo analysts Steven Cahall and Brian Fitzgerald said in a statement. .
“The biggest threat to network TV resilience, in our view, is AVOD (ad-supported video on demand), and specifically Netflix as a new competitor,” Cahall and Fitzgerald wrote. “We think Netflix could steal about 10% of the linear ad market if it could hit 20 million AVOD subscriptions.”
But Netflix will face the same rivals in the AVOD market as in the ad-free subscription video on demand market. Those rivals include Comcast (CMCSA), Disney, Basic (PARA) And Discovery of Warner Bros (WBD).
Netflix shares form a flat base
Jefferies analyst Andrew Uerkwitz is taking a wait-and-see approach to Netflix’s ad foray. He rates Netflix shares as held with a price target of 230.
“We remain cautiously positive,” Uerkwitz said in a note to customers. “However, with sentiment centered around competitive rankings, a lack of near-term growth and a lot to prove, we don’t see investors turning positive until this ‘show-me’ stock proves valid.”
Netflix based in Los Gatos, California lost 970,000 subscribers in the second quarter, ending the period with 220.67 million subscribers worldwide. In the first quarter, it lost 200,000 subscribers. For the current quarter, Netflix plans to add 1 million subscribers.
The next catalyst for Netflix stock could be the company’s third quarter earnings report on October 18.
After the investor shock over the past 10 months, Netflix shares have formed a flat base with a buy point of 252.09, according to IBD MarketSmith charts.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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