Netflix stock rides 7-month high amid ad tier rollout

·Senior Reporter

November 15, 2022 at 6:54 AM·4 min read

Netflix stock (NFLX) is at a 7-month high after three straight sessions of gains, buoyed by bullish investor sentiment surrounding the streaming platform's newly launched ad-supported tier.

Shares of the media giant, down roughly 50% since the start of the year, have climbed nearly 60% over the past six months. The stock rose more than 3.5% in afternoon trading on Tuesday.

In a new note published early Tuesday morning, Bank of America Analyst Jessica Reif reinstated coverage of the stock with a Buy rating and a 12-month price target of $370 a share (+24% upside potential).

"Our valuation accounts for Netflix's leading position within the still burgeoning shift towards non-linear video viewing, a strong runway for subscriber growth outside of the US (particularly across developing markets), upside from the initial advertising video on demand (AVOD) offering as well as its ramping profitability and strengthening [free cash flow] profile," the analyst wrote.

Reif went on to explain that, despite near-term macroeconomic challenges and greater competition within the ad space overall, Netflix's ad tier will add to its ability to drive engagement and will increase incremental revenue and subscriber growth over time.

The analyst also underscored the potential of "extraordinary advertiser demand" for Netflix's inventory, citing the platform's ability to reach younger demographics and offer exposure to cord-cutters and cord-nevers (who have never used cable services).

She argued that this will increase the likelihood of Netflix receiving a premium cost per 1,000 impressions (CPM) while the platform's partnership with Microsoft on the ad-tier limits potential downside.

The ad plan, dubbed "Basic with Ads," rolled out on November 3 with a price tag of $6.99 a month in the U.S. — just below Disney's ad-based price point of $7.99 (which will roll out on December 8.)

"It is absolutely a pivotal moment for the industry," Kevin Krim, CEO of advertising measurement platform EDO, previously told Yahoo Finance, citing Amazon's (AMZN) Thursday Night Football as another watershed moment when streaming, subscription, and ad-supported went to the masses.

Looking back, the executive explained, this "will be the moment where the vast majority of Americans became crystal clear that there's going to be a new way to get the must-watch TV that they care about — and it's going to be through a subscription-based and an ad-supported business model."

Netflix added 2.41 million net subscriber additions in the third quarter— crushing estimates of 1 million. The results marked the first time this year that the company has added subscribers, which mostly came from outside of the United States.

In the first and second quarters, Netflix lost 200,000 and 970,000 subscribers, respectively. The company said it will stop giving guidance on paid memberships moving forward due to its introduction of new revenue streams. For now, though, Netflix estimated an addition of 4.5 million subscribers next quarter (above prior forecasts of 3.9 million.)

Netflix attributed its success in the quarter to several TV and film hits, including "Monster: The Jeffrey Dahmer Story," "Stranger Things S4," "Extraordinary Attorney Woo," "The Gray Man," and "Purple Hearts."

On the October 18 earnings call, Netflix Co-CEO Ted Sarandos said the company, which has committed to spend $17 billion on content in 2022, is working to get "better and better" at securing "more impact per $1 billion spend than anybody else." He added:"That's how we're focusing on it — we're spending at about the right level."

Despite concerns that current subscribers will trade down to the ad-supported version, Citi Managing Director Jason Bazinet told Yahoo Finance Live that he views the introduction of advertising as a lucrative revenue driver.

"It's not a spin down risk — it's a spin up opportunity," the analyst maintained, surmising that the company could secure $10 or more in advertising revenue per ad-tier subscriber in the U.S.

Coupled with the prospects of advertising, Netflix has also expanded the scope of its programming.

The company will dip its toe into live streaming for the first time next year with Chris Rock hosting his comedy special in real time. The event will be available to watch in early 2023, according to the company.

Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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