One of last week’s gainers — a rare sight with the major market averages tanking roughly 5% — was Netflix (NFLX -1.04%). The leading premium video streaming service saw its shares climb 3%, bucking Wall Street’s downward trend after a couple of analysts chimed in with bullish updates.
Rosy notes by analysts at J.P. Morgan and Evercore ahead of the launch of Netflix’s ad-supported tier helped send the stock higher, but the bullish chorus wasn’t a one-week wonder. Oppenheimer is kicking off the new trading week by boosting its rating on Netflix stock from perform to outperform.
There’s always something good on TV now
Jason Helfstein at Oppenheimer is rallying behind the potential of Netflix now that it has embraced the ad-supported model it has stayed away from since pioneering the premium video streaming market 15 years ago. Netflix will continue to be available in its present form — free of marketing missives — but viewers looking for cheaper access will soon be able to opt in for a cheaper tier that includes video ads wedged among the platform’s popular content.
Netflix has proven itself worthy on its own. It had 220.7 million paid streaming memberships worldwide at the end of June. However, after back-to-back quarters of sequential declines in subscribers it’s feeling pretty mortal. Streaming has become a cutthroat market, and along with what may have been an ill-advised price hike earlier this year, Netflix realizes it needs to give its audience a cheaper way into the platform. Netflix expects to launch the new ad-backed tier early next year, but some reports suggest that it may launch as soon as later this year. Investors should have a clearer timeline and potential pricing when Netflix announces results for its third quarter next month.
Oppenheimer’s Helfstein believes that the launch of an advertising tier can accelerate subscriber growth and keep members from fleeing the service. Despite the consumer appeal of the new service being the lower monthly price point, Helfstein believes it can ultimately drive average revenue per user. With Netflix users spending hours on the platform, it’s easy to see how it can add up in volume. Netflix is also hoping that marketers are willing to pay top dollar to reach Netflix’s historically elusive audience when it comes to consuming TV commercials.
Helfstein is forecasting annual global advertising revenue of $4.6 billion by 2025, a decent chunk of the $42.4 billion he’s modeling on the top line for Netflix that year. It’s not just about the ad revenue, of course. He sees Netflix hitting 282 million subscribers in three years, as the more economical ad-supported plan should help improve the churn rate at Netflix while drawing new subscribers. His $325 price target on the shares suggests 35% of upside from current levels.
Netflix itself has high hopes for the new offering. It expects to have 40 million accounts on the new plan a year from now, with a third of them coming from the U.S. market. It will naturally be great if those 40 million memberships are new to Netflix, but undeniably the bulk of them will be existing users trading down to score cheaper access to the widening Netflix catalog of content.
Consumer trends continue to favor the streaming media stocks. The online platforms are gaining share at the expense of linear TV, and the breadth of shows and movies available on demand will keep drawing entertainment-hungry audiences. Naturally all of the love that Netflix is receiving now can turn the other way if recessionary feelings cool the connected TV ad market, but the medium should still hold up better than the general advertising market if folks are saving money by spending more time at home. Netflix has a lot riding on this new approach, and Wall Street likes what it sees for now.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Rick Munarriz has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.