Netflix's ad-supported tier could launch company 'back into growth mode

 

"Stranger Things" (Courtesy: Netflix) 

Wall Street is betting big on Netflix (NFLX) and its upcoming ad-supported tier.

Oppenheimer upgraded shares of the streaming giant to Outperform on Monday, citing increased opportunity in the ad space. "Netflix is in a unique position to aggregate large audiences and control the timing of series launches for top-tier advertisers, commanding high [cost per thousand views]," Oppenheimer Analyst Jason Helfstein wrote in a new note to clients.

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Helfstein, who has a current price target of $325 per share, is expecting Netflix's advertising revenue to reach $4.6 billion by 2025, driving total revenue to $42.4 billion with 282 million subscribers. He noted further upside potential in shared accounts, cloud saving, and gaming. Oppenheimer's upgrade follows last week's price target boost from Citigroup. 

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The bank raised its price target for Netflix from $275 to $305 a share, with Citigroup Analyst Jason Bazinet estimating that an ad tier will add about 65 million global subscribers.

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"Netflix doesn't have a natural shareholder base," Bazinet told Yahoo Finance Live (video above) "It's not adding subs, so it's not a growth stock. It doesn't have a lot of cash flow, so it's not a value stock...[But] if 65 million new customers sign up, we could go back into growth mode."

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Despite Wall Street's optimism, investors don't seem convinced just yet. The stock, although up about 44% from its May lows, is still down 60% year-to-date.

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"The trepidation on the part of the buy side is [that] it's going to take too long," Bazinet said, noting it will likely take over a year until investors start to see the full benefits of advertising. "Investors aren't that animated about it right now, because that's a long time for a lot of the fast money funds. I look at it exactly the opposite...now is actually the time to re-buy." 

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Netflix estimated that its ad-supported tier will reach 40 million viewers by the end of next year, according to a recent report from The Wall Street Journal, which noted that executives at Netflix and its advertising partner Microsoft (MSFT) met with ad buyers in recent weeks.

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"We are still in the early days of deciding how to launch a lower-priced, ad-supported tier and no decisions have been made," a Netflix spokesperson told Yahoo Finance at the time. "So this is all just speculation at this point."
As competition intensifies in the streaming space and Wall Street looks beyond subscriber counts, platforms have grown more open to exploring various distribution and pricing models in order to diversify audiences and offset shrinking growth, notably through ads.

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Netflix and Disney (DIS) are the latest platforms to hop on the ad-tier bandwagon, with the latter aiming to officially launch its ad option on Dec. 8. Netflix also recently announced two senior hires in its own efforts to roll out an ad-supported tier next year, although new reports now say the company is moving up the launch to Nov. 1 in order to get ahead of Disney's December timeline.

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The ad-supported will cost between $7 to $9 a month, according to Bloomberg, with the company planning to play four minutes of ads for every hour of content. 

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Netflix is looking to charge advertisers roughly $65 for reaching 1,000 viewers (a measure otherwise known as CPM or "cost per thousand"), WSJ previously reported. That charge is significantly higher than most other streaming competitors.

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