Netflix stock was a big winner during the first year and a half of the Covid-19 pandemic as consumers sheltered in place and relied on its streaming video service for entertainment. Now, facing declining subscribers amid high inflation and intense competition, Netflix hopes a new, advertising-subsidized service level will put it on the growth path again.
But Wall Street is divided on the prospects for a cheaper, ad-based service tier.
Some analysts think Netflix can quickly scale up to become a major player in the ad-supported video-on-demand market. But others think it will cannibalize its existing service as subscribers trade down to the new, lower-priced ad tier.
Netflix plans to launch its ad-supported service on Nov. 1 and charge between $7 and $10 a month, according to news reports. Its standard ad-free streaming service costs $15.49 a month.
Meanwhile, rival Walt Disney plans to debut its ad-subsidized Disney+ Basic service on Dec. 8 for $7.99 a month.
Aiming For 40 Million Ad Viewers In Year One
Netflix is telling ad buyers that it expects to reach about 40 million viewers globally for its ad-supported tier by the third quarter of 2023, the Wall Street Journal reported. Further, it expects to have 4.4 million viewers for the service by the end of this year, including 1.1 million in the U.S.
The metric Netflix shared, "projected unique viewers," will be higher than the number of subscribers for the new service because of multiple people in each household using it.
KeyBanc Capital Markets analyst Justin Patterson is skeptical about prospects for Netflix's ad-subsidized service.
To achieve 40 million viewers in a year, Netflix likely would cannibalize its premium, ad-free subscription business, he said in a note to clients. And that "would beg the question of whether ad revenue can be accretive to margins in year one," he said. Patterson rates Netflix stock as sector weight, or neutral.
Opportunity To Attract Previous Subscribers
Oppenheimer analyst Jason Helfstein is upbeat on Netflix's ad-supported tier. He thinks it will accelerate subscriber growth and slow churn for the company.
"Netflix is in a unique position to aggregate large audiences and control the timing of series launches for top-tier advertisers," Helfstein said in his note to clients. It also should be able to command high ad rates, he said.
While Netflix's ad-subsidized service will attract some first-time subscribers, the bigger opportunity is to re-engage with customers who had quit Netflix, Helfstein said.
Helfstein predicts that Netflix will generate global advertising revenue of $4.6 billion in 2025, driving total revenue to $42.4 billion. Also, he thinks Netflix will reach 282 million total subscribers in 2025.
Helfstein rates Netflix stock as outperform with a 12- to 18-month price target 325.
Netflix Stock Crash Lands
Netflix stock has crashed since hitting a record high of 700.99 last November. It ended the regular session Friday at 226.41.
If successful in its new initiative, Netflix could take a big chunk of advertising dollars that today go to linear TV services, including broadcast networks and cable, Wells Fargo analysts Steven Cahall and Brian Fitzgerald said in a recent note.
"The biggest threat to network TV's resilience, in our view, is AVOD (ad-supported video on demand), and in particular Netflix as a new entrant," Cahall and Fitzgerald wrote. "We think Netflix could steal about 10% of the linear ad market if it can get to 20 million AVOD subs."
But Netflix will face the same rivals in the AVOD market as it did in the ad-free subscription video-on-demand market. Those rivals include Comcast, Disney, Paramount and Warner Bros. Discovery.
Netflix Stock Forms Flat Base
Jefferies analyst Andrew Uerkwitz is taking a wait-and-see approach to Netflix's advertising foray. He rates Netflix stock as hold with a price target of 230.
"We remain cautiously positive," Uerkwitz said in a note to clients. "However, with sentiment focused on the competitive slate, near-term lack of growth, and a lot to prove, we don't see investors turning positive until this 'show-me' stock proves itself."
Los Gatos, Calif.-based Netflix 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 predicted adding 1 million subscribers.
The next catalyst for Netflix stock could be the company's third-quarter earnings report on Oct. 18.
After the shakeout of investors over the past 10 months, Netflix stock has 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.
