Will Netflix’s Advertising Strategy Move The Needle For The Stock?

Netflix (NASDAQ:NFLX) finally unveiled its new ad-supported plan in 12 countries including the U.S. The new tier, called “Basic with Ads” will be launched on November 3. The success of the new plan will be important for Netflix, as it needs to bolster subscriber additions and monetization in order to fund its massive content investments and shore up its stock price, which has declined by over 60% year to date.

Now, the pricing for the new plan is competitive, coming in at $7 per month, $3 below the current Basic plan. The price also undercuts Disney’s new ad-supported service, which will launch in December at a price of $8 per month, and HBO Max’s ad-supported plan which comes in at about $10 per month. We think the price point will help Netflix with its subscriber ads, given that its ad-free plans have become increasingly expensive over the years, proving an issue for Netflix, particularly in the current environment with inflation hurting household budgets and consumer spending.

However, we aren’t so sure about how attractive the plan will appear to advertisers. Netflix is apparently looking to charge as much as $60 and $65 for ads to reach 1,000 people, per the Wall Street Journal, while eventually charging as much as $80 per 1,000 impressions, almost at par with top NFL programming. However, the features of the plan don’t seem to support premium positioning. Netflix said it would include 4 to 5 minutes of commercials each hour, consisting of 15 and 30-second ads and we think this might translate into a relatively high ad load, which could take away from the overall Netflix experience. Moreover, like the Basic plan, Ad-supported subscribers will be limited to viewing from a single device at a time and won’t be able to download shows for offline viewing. The resolution will also be limited to basic HD compared to Netflix’s most popular $15 standard full HD plan. The ad-supported version will not initially offer Netflix’s full content catalog due to licensing restrictions.

That said, it’s still early days for Netflix in the advertising space. The company has said that monetization on the new ad-supported plans could be similar to, or even better than, non-ad, subscription-only plans, and this model has been proven by other players such as Hulu in the past. We think it’s likely that Netflix will eventually tweak its ad-based plan or even offer different tiers with additional features helping it broaden the appeal of these plans.

We remain positive on Netflix stock, with a price estimate of $317 per share, which is 38% ahead of the current market price. See our analysis Netflix Valuation: Expensive or Cheap for more details on what’s driving our price estimate for Netflix. Also, check out the analysis of Netflix Revenue for more details on how Netflix revenues are trending.

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