Will Netflix’s advertising strategy work?

Netflix is ​​doubling down on plans to offer ad-supported plans after two straight quarters of subscriber losses. The success of the new plan will be important for Netflix
, as it needs to bolster subscriber additions and monetization to fund its massive content investments and shore up its share price, which is down 61% year-to-date. Below, we take a look at how the new offering is expected to impact Netflix.

With continuous price increases, Netflix services have become expensive compared to the competition. The company’s most popular high-definition plan costs more than $15 per month. By comparison, Disney+ costs around $8 per month. This is proving a problem for Netflix, given that rising inflation is hurting household budgets and consumer spending, just at a time when people are relying a little less on streaming as a means of entertainment post-lockdowns. of Covid-19. With the new ad-supported tier, which will likely be priced well below $10 per month, Netflix should be able to target more price-sensitive customers, helping its subscriber growth. Netflix is ​​likely to differentiate the plan from its standard offering, with the low-cost tier not expected to offer the company’s full catalog of content, which could help prevent ad-free customers from switching to the low-cost service.

Netflix has indicated that its monetization on new ad-supported plans could be similar to, or even better than, ad-free, subscription-only plans. While the new plan is likely to have a monthly subscription of less than $10 per month, Netflix is ​​likely to generate considerable ad revenue. The company is apparently positioning itself as a premium option for advertisers and is likely to charge up to $60 and $65 for ads to reach 1,000 people, according to the Wall Street Journal, while ultimately charging up to $80 for 1,000. prints. That would put it nearly on par with the best lineup in the NFL. This is entirely possible, as Netflix services cater to a younger demographic and are generally geared towards more affluent households, which makes them attractive to marketers.

Now, Netflix has expanded its advertising capabilities in recent months. He hired Snapchat’s top ad sales manager to build an ad team while partnering with Microsoft
to use some of its technologies, such as the Xandr demand-side platform that allows marketers to buy programmatic ads. That said, there are also challenges. Competition for streaming ad dollars is also expected to heat up, with other players such as Hulu and HBO Max offering ad-supported tiers, and Disney+ expected to launch its own ad-supported plan. The advertising market is also experiencing a slowdown, with US GDP contracting over the past two quarters and marketers becoming more judicious in their spending in the face of soaring inflation.

We think Netflix stock looks compelling at current levels. The stock remains down around 61% year-to-date, due to recent subscriber losses and wider market rotation of Covid winners. With shares priced around $234 per share, Netflix is ​​trading at levels last seen in early 2018, before the global Covid-19 pandemic. However, Netflix has come a long way since then. For example, the company has doubled its subscriber base since 2018, despite raising prices several times during the period, with its churn rates remaining the lowest in the streaming industry. The stock now trades at around 21 times consensus earnings forecast for 2023, down from levels over 90 times before the pandemic. Given this, we remain positive on Netflix stock, with a price estimate of $317 per share, 36% ahead of the current market price. See our analysis Netflix Rating: Expensive or cheap for more details on what drives our price estimate for Netflix. See also the analysis of Netflix revenue for more details on Netflix’s revenue trend.

With inflation rising and the Fed raising interest rates, Netflix has fallen 61% this year. Can it fall more? See how low Netflix stock can go by comparing its drop in previous stock market crashes. Here is a summary of how all stocks performed during previous stock market crashes.

What if you were looking for a more balanced portfolio instead? Our quality portfolio and multi-strategy portfolio have consistently beaten the market since late 2016.

Invest with Trefis Wallets that beat the market

See everything Trefis Price estimates