Netflix stock gets an update as the company plans its level of hype

by Emily Barry

Macquarie analyst abandons bearish stance on Netflix amid increased confidence in ad efforts

Macquarie analyst Tim Nollen dropped his bearish case on Netflix Inc. stock on Wednesday, writing that he was “more confident in the company’s long-term upside potential” as the company dives into the hype.

Its update of Netflix (NFLX) shares to neutral from an underperformer came as part of a broader look at Netflix’s opportunities in advertising as the company prepares to launch an ad-supported tier of its service.

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It’s true that Netflix faces “numerous trade-offs” in its advertising efforts, according to Nollen, as the company wants to build an ad-supported user base that attracts marketers, but some of the traction for its level of advertising will come from users. Existing Netflix subscribers switch to a lower-priced plan that includes ads. In other words, Netflix’s revenue opportunities from advertising will not be solely incremental, as some could come at the expense of existing ad-free tiers.

Read: Netflix seeks to renegotiate programming agreements to allow ads to be shown

“Netflix will look to encourage users to embrace the ad level to provide the eyeballs advertisers covet, the effort dilutes revenue to some degree, so we think you need to make the right mix,” Nollen wrote. She estimated that the level of ads could help generate $3.6 billion in US and Canadian revenue in 2025, though only $1.1 billion of that would be incremental.

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Globally, it forecasts $8.5 billion in ad revenue by 2025, or $2.1 billion in incremental opportunities, assuming Netflix can boost its ad business internationally by then. It also assumes that an ad-supported tier helps Netflix bring an additional 10% subscribers to its counts in Europe, the Middle East and Africa, Latin America, and Asia-Pacific.

“These assumptions may seem aggressive, but we believe they demonstrate both the advertising opportunity and the corresponding ARPU trade-off. [average revenue per user]: International ad levels only increase incremental revenue by $1 billion or 4% in our model,” he wrote.

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Shares of Netflix rose 2.2% in midday trading on Wednesday. They have gained 12% in the last three months, while the S&P 500 has lost around 5%.

-Emily Barry


(END) Dow Jones Newswires

09-07-22 1211ET

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