Wall Street analysts are divided over prospects for Netflix's cheaper, ad-subsidized service after the streaming video company disclosed details of the offering. Netflix stock fell on Friday.
Late Thursday, Netflix announced that the advertising-supported service, called Netflix Basic With Ads, will launch on Nov. 3 in 12 countries, including the U.S. It will cost $6.99 a month, compared with $9.99 a month for the ad-free version.
Additionally, the new plan will average four to five minutes of ads per hour. The ads will be 15 or 30 seconds in length and play before and during shows and films.
In a blog post, Netflix Chief Operating Officer Greg Peters said Netflix was able to launch its ad-supported service just six months after it was announced because of its partnership with Microsoft.
Meanwhile, Wedbush Securities analyst Michael Pachter thinks the new ad-supported tier will help Netflix reduce subscriber churn. Customers who might otherwise quit the service now will have an option to trade down to a lower-priced service level with ads, he said.
Pachter rates Netflix stock as outperform with a 12-month price target of 280.
Netflix Stock Consolidating
On the stock market today, Netflix stock slid 1.1% to close at 230. Netflix stock has been consolidating for the past nine weeks with a buy point of 252.09, according to IBD MarketSmith charts.
Netflix priced its ad-supported service near the midrange of the competition, William Blair analyst Ralph Schackart said in a note to clients. HBO Max from Warner Bros. Discovery is at the high end with its ad tier starting at $9.99 a month.
Peacock from Comcast is at the low end at $4.99 a month. Walt Disney's ad-supported Disney+ Basic service will cost $7.99 a month when it launches on Dec. 8.
"While we remain optimistic about Netflix's newest offering and its ability to convert new users to the platform, we highlight the risk of potential cannibalization among its existing user base with this lower-priced offering," Schackart said in a note to clients. He rates Netflix stock as outperform.
Analyst Sees Limited Uptake For New Service
Rosenblatt Securities analyst Barton Crockett said the details of Netflix's ad sales plan are "disappointing relative to expectations that have propelled recent strength in the shares." He has a neutral rating on Netflix stock.
"We see limited uptake for Netflix's ad plan," Crockett said in a note to clients. He said the offering "looks small and cautionary."
Wells Fargo analyst Steven Cahall said it will take time for Netflix to build up its ad-viewing audience.
"It may take a little while to scale impressions, build audiences and ultimately deliver a platform that can take in major advertising dollars that satisfy frequency and reach requirements," Cahall said in his note to clients. "So, we think Netflix will be a disruptor in the 2024 (but not '23) TV upfronts."
Cahall rates Netflix stock as equal weight, or neutral.
Netflix Stock Ranks First In Lowly Industry Group
Netflix has partnered with DoubleVerify and Integral Ad Science to verify the viewability and traffic validity of its ads starting in first-quarter 2023. Also, Nielsen will provide its audience measurement technology for the service sometime in 2023.
Netflix is likely to provide more details about the impact of the advertising business late Tuesday on its third-quarter earnings call.
Netflix stock ranks first out of 21 stocks in IBD's Leisure-Movies and Related industry group, according to IBD Stock Checkup. But it has a middling IBD Composite Rating of 58 out of 99. Plus, its industry group ranks a dismal No. 187 out of 197 industry groups that IBD tracks.
IBD trading guidelines recommend focusing on top-rated stocks in leading industry groups.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
