Netflix stock (NYSE: NFLX) soared over 9% yesterday after Atlantic Equities upgraded it from neutral to overweight and raised its target price from $211 to $283. The brokerage is bullish on the company’s upcoming ad-supported tier.
Netflix was averse to an ad-supported tier. However, after it lost 200,000 subscribers in the first quarter, it talked about the possibility of an ad-supported tier like some of its peers. Netflix lost another 1 million subscribers in the second quarter. After the Q2 subscriber loss, Netflix’s total subscribers fell below that of Disney for the first time ever.
It is no mean achievement for Disney which launched its Disney+ streaming service only in the back half of 2019. However, the service grew at a fast pace in 2020 amid the global lockdowns. Also, while Netflix’s subscriber growth has come down greatly, Disney is still getting good traction, especially in emerging markets.
Netflix to soon launch an ad-supported tier
Netflix partnered with Microsoft for the ad-supported tier. The company hasn’t yet disclosed the pricing as well as the timing of the launch. It had previously said that the service would be launched in early 2023. However, Bloomberg reported that Netflix would launch the service in November only, ahead of the launch of the ad-supported tier of Disney+.
Disney would start offering an ad-supported tier in the US from December which would be priced at $7.99 per month. The price for the ad-free tier would rise by $3 to $10.99. While Netflix hasn’t revealed the pricing, the WSJ reported that the tier might be priced between $7-$9 which would make it quite competitive against Disney+.
Atlantic Equities upgraded Netflix stock
Atlantic Equities is bullish on NFLX’s ad-supported tier. Analyst Hamilton Faber believes that the company could generate an ARPU (average revenue per user) of $26 from the ad-supported tier, which is thrice what Hulu gets.
Reportedly, Netflix is reportedly looking to charge advertisers $65 for every 1,000 views. While there are concerns that some of the current subscribers might move to the lower-priced ad-supported tier, Hamilton believes that the service would be ARPU accretive.
He said, “Given the current US ARPU is $16, that gives the company huge flexibility in offering a low priced ad-supported tier.” Hamilton added, “It also means that any subscribers that move from ad-free to ad-supported are likely to be highly accretive to total ARPU.”
He predicts that revenues from the ad-supported tier would surpass $8 billion in 2025 and account for between 15-20% of the company’s revenues.
NFLX reported earnings beat in the second quarter
Netflix reported revenues of $7.97 billion in Q2 2022, which were below the $8.035 billion that analysts were expecting. However, its adjusted EPS of $3.20 was higher than the $2.97 that analysts were expecting.
In its shareholder letter, Netflix said, “Q2 was better-than-expected on membership growth, and foreign exchange was worse-than-expected (stronger US dollar), resulting in 9% revenue growth (13% constant currency). Our challenge and opportunity is to accelerate our revenue and membership growth by continuing to improve our product, content, and marketing as we’ve done for the last 25 years, and to better monetize our big audience.”
The management’s commentary was quite optimistic when compared with the first quarter earnings release when it admitted to higher competition and peak penetration in some markets.
After two-quarters of subscriber loss, Netflix said that it expects to add 1 million subscribers in the third quarter of 2022. It is also testing two models to curb the practice of password sharing. The company estimates that 100 million households globally watch its content through shared passwords.
Some analysts don’t see an ad-supported tier as a gamechanger
Since Netflix is peaking in North America, the company sees international expansion as a key driver. In the earnings release, it said, “We want Netflix to be relevant to audiences all over the globe and our local language titles are a differentiator for us. We focus first on telling authentic stories for local impact, but we see that great stories can travel everywhere.”
Meanwhile, not all analysts all bullish on its ad-supported tier. Needham believes that Netflix would not be able to win the streaming war even with its ad-supported tier. After the Q2 2022 earnings release, Credit Suisse also said that Netflix might continue to feel the pain for some more time.
However, Netflix has rebounded sharply from its 2022 lows even as its YTD losses are still near 60%. Fellow FAANG peer Meta Platforms is also down 58% for the year. However, while Meta Platforms is languishing near its 52-week lows, Netflix has rebounded from its 52-week lows, partially because of the optimism over its ad-supported tier.