The first assessments of Netflix’s plans for its upcoming ad level, revealed on Thursday, are in, and several Wall Street analysts are optimistic about what these details will mean for the streaming giant’s subscriber and financial prospects.
In a report following the unveiling, Evercore ISI analyst Mark Mahaney reiterated his “outperform” rating and price target of $300 on Netflix stock after an upgrade in September, praising the ad tier’s launch as “the biggest catalyst in the internet sector.” . Netflix shares are currently at 235.35 as of early Friday trading, days ahead of the third quarter earnings report due on Oct. 18.
Evercore ISI analyst’s main conclusion: “The offering’s low price ($6.99 vs $9.99 for Netflix’s basic plan), its simplicity (one ad-supported tier) and differentiation (one supported device simultaneously, no download capability and HD vs. two supported devices, download capability and full HD for the $15.49 standard plan) is likely to significantly enhance Netflix’s value proposition to consumers, help reduce customer churn, and expand gross subscriber base through one of the largest address challenges the service has faced over the past few years – rising price sensitivity, as tracked by our relentless surveys.”
And, Mahaney argued, his Wall Street colleagues and investors may not be giving the streaming giant full credit for the move just yet. “We don’t believe this is reflected correctly in Street’s estimates or in the company’s current valuation,” the analyst noted. “Overall, we view this offering as a very attractive value proposition for consumers and a clear positive for the stock.”
How does the ad tier price compare to rivals? “This is a very competitive price, compared to peer ad-supported services of $7.99 for Hulu and Disney+ and $9.99 for HBO Max,” Mahaney offered. But he also suggested that “the limit on simultaneous streaming (basic plans only allow one) and limited video quality should act as a deterrent to compromise.”
Others also discussed subscriber impact. “We believe that the new level could provide an increase of about 4 million subs in the US alone and drive further sub-penetration,” wrote Cowen analyst John Blackledge, who has an “outperform” rating and price target. of $325 for the stock, in an initial response Thursday in a note to investors.
He cited a “patented analysis” from June that “suggests that if Netflix introduces an ad-supported tier in late ’22 and about 8 percent of disconnected households sign up (33 percent of ‘somewhat likely’ and 85 percent of ‘extremely likely’). likely”), Netflix could add about 4.3 million incremental US/Canada members in ’23 and generate a mixed US/Canada ARM (average revenue per member) about 8 percent above Q1 2022 levels. is.”
a september Wall Street Journal article quoted an internal corporate document targeting approximately 40 million worldwide”unique viewers” for its ad level by the third quarter of 2023. “This figure would likely be higher than paid subscriptions in our view, due to multiple viewers per household,” the Cowen analyst wrote. “The article also cites a Netflix target of 13.3 million ad-supported viewers in the US by the third quarter of 2023.”
Overall, Blackledge spoke of a “significant opportunity to unlock membership growth among price-sensitive customers” on Thursday.
Guggenheim analyst Michael Morris, who maintained his “buy” rating and a $265 price target in his report, emphasized the streamer’s initial ad focus on markets with proven appeal. “We believe Netflix has focused its initial ad launch strategy primarily on countries with established video ad markets and countries with the most incremental market penetration opportunities,” Morris wrote before also highlighting the streamer’s potential benefits. “Nine of the 12 launch markets have broadband home membership penetration at levels below the US rate of 54 percent. Combined with the continued development and release of content in the local market, we believe that the cheaper, ad-supported tier offers inordinate potential for member growth in these countries.”
Morris then cited estimates from S&P Global that total ad spend for video, pay TV, free to air, desktop and mobile video in the markets where Netflix is launching its ad tier will grow 7 percent over the next four years. an estimated $161 billion this year to more than $170 billion. “We consider Netflix well positioned to capture market share as advertisers look to reach its diverse audience, including younger viewers who spend less time on traditional TV,” he concluded.
Meanwhile, Michael Nathanson of MoffettNathanson, who has a “market performance” rating and a $220 price target on Netflix stock, focused in his report on answering this question: “Have we understood key ad assumptions correctly? ‘ After all, in an Oct. 4 report, he had estimated Netflix’s advertising opportunity, projecting it to hit $1 billion by 2023, including $700 million from the US and Canada, plus $300 million from international markets.
Nathanson had assumed that the ad tier in the US “would cost $7.99 initially,” he noted. “In fact, the price of the ad tier in the US was $1 lower at $6.99 per month. The international price assumptions for the ad levels are essentially in line. On the other hand, Netflix initially plans to have 4-5 minutes of commercials per hour as opposed to our initial assumption of 4 minutes per hour.”
Nathanson then analyzed the amount of content that is part of the ad tier. “Another variable that was slightly better than expected was the percentage of viewers of content cleared for commercial revenue,” he wrote. “We assumed 80 percent of minutes would be freed up for ad exploitation by 2023, as opposed to the company’s estimate of 90-95 percent.”
How come? “On a net basis, the lower-than-expected price is largely offset by a higher-than-expected ad load and slightly more earnings for minutes,” concluded the MoffettNathanson expert. “Netflix expects the ad tier to be neutral to positive on a revenue basis compared to the ad-free offering. This is consistent with our own analysis suggesting that the ad tier will make a modest contribution to revenue per user.”
Nathanson’s takeaway for Netflix stock: “We see this pivot as an incremental positive for Netflix’s financials. However, we are below Street estimates for the first time in a while as other forecasters may be overly optimistic about the impact of this pivot, while ignoring the headwinds of foreign exchange for short-term profit and revenue per user.
Meanwhile, UK-based PP Foresight analyst Paolo Pescatore said: THR that the launch of the ad tier changes the Netflix story. “The move to offer some kind of advertising service wasn’t part of the company’s script. It’s clear it’s been forced on him,” he argued. “Clearly, the streaming pandemic party is definitely over. During this time, we saw a rapid increase in consumer adoption, driving subscription revenue. Conversely, during a recession, users will be forced to make difficult decisions regarding the need to continue paying or signing up for a slew of services. Adding an ad tier will allow Netflix to further diversify its business model and offer something for everyone that should appeal to a wide range of users.”
While “users are used to getting something for free with an ad-based service, without paying for a subscription,” the approach “allows Netflix to keep its proven subscription formula, and the £4.99 (in the UK) access point ) is enough to entice users to sign up, especially when you consider the huge catalog of programming,” Pescatore said.
The analyst also sees the appeal for marketers. “Netflix’s growing subscriber base of more than 200 million will be an attractive showcase for advertisers and brands,” he said. But there can also be jitters ahead. “All key stakeholders will need to work more closely together to ensure users are not bombarded with spam,” Pescatore said. “Consumers will also have to brace themselves to place ads on a service that has been ad-free; this will be a culture shock.”
His advice to the streamer: “Managing expectations will be important by making sure the right ads are showing, otherwise users will cancel.”
Wells Fargo’s Steven Cahall discussed the impact of Netflix’s ad layer on the broader advertising market on Friday. “The launch of Basic with Ads shows impressive speed for consumers. However, we think it may take time to scale impressions, build audiences and eventually deliver a platform that can take in big advertising dollars that meet the frequency and reach requirements, so we think Netflix will be a disruptor in 2024 (but not ’23) TV upfronts,” he wrote. “We also think Netflix may eschew programmatic sales for some time to create more scarcity around impressions, and support higher (advertising rates). Growth in premium content AVOD led by Netflix remains a major risk for linear TV advertising in the market. future, and especially the linear distribution market in our view (about 50 percent of cable network advertising sales and 30-40 percent for broadcasting).”
