Can Advertising Spark a Netflix Rebound?

Analysts are waiting to see if the action by Netflix (NFLX) to adopt advertising on its platform will revive its revenue growth and sagging stock price.  At least three Wall Street firms have upgraded Netflix this month, citing its planned introduction this year of an ad-supported subscriber tier. 

Shares of Netflix have plunged 60% this year, making it the fourth-worst performer in the Nasdaq 100 Stock Index ($IUXX) (QQQ).  Most of Netflix’s losses this year followed a pair of catastrophic quarterly earnings reports, including the first quarter since 2011 that the company’s subscriber base shrank.  The disastrous earnings results prompted Netflix to begin an ad-supported tier system to revive revenue streams.

The Wall Street Journal reported that Netflix projects its new ad-supported offering will reach about 40 million viewers by Q3 of 2023.  Netflix has long resisted introducing ads to its services, preferring to count on hit series like “Squid Game” and “Stranger Things” to attract paying customers.  However, with the end of the pandemic and reduced consumer spending due to inflation, Netflix reported a massive customer loss this year.

With a lower monthly cost, Netflix’s new ad-supported offering could provide a new revenue stream and attract a broader user base.  On Monday, Oppenheimer upgraded Netflix to outperform from perform and said the ad tier “should accelerate subscriber growth.”  Also, Evercore ISI last Thursday upgraded the stock to outperform from inline and called the ad offering “a clear catalyst on the horizon.” In addition, Huntington Private Bank said even if the ad-supported service doesn’t solve the company’s woes, the stock is more attractive as it offers both value and growth characteristics.

Growing optimism in Netflix’s ad-supported offering has supported the stock.  Since June 16, the stock is up +41%, compared with a +7.4% gain for the Nasdaq 100 Index.  Netflix’s valuation may add to the bullish case for the stock.  Netflix trades at 22 times estimated earnings versus a 10-year average above 80 and the Nasdaq 100’s 20.6 estimated earnings.  The Janus Henderson Global Technology Fund said Netflix’s valuation and prospects make it more attractive than other fallen market favorites like Meta Platforms (META). 

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