Internet television network Netflix has yet to disclose publicly the details of its upcoming advertising-subsidized streaming service, but analysts are already evaluating its potential impact on Netflix stock.
MoffettNathanson analyst Michael Nathanson believes sell-side analysts are overestimating the opportunity. In a note to clients Tuesday, Nathanson said Wall Street consensus estimates are too high for revenue and earnings growth from the Netflix ad-supported service tier.
He estimates that Netflix could generate $2.7 billion in ad revenue worldwide in 2025, including $1.7 billion in the U.S. and Canada. However, some of the growth in ad revenue will be offset by lower subscription revenue, as some customers trade down to the lower-priced service level, Nathanson said.
His estimates are based on news leaks. "Press reports have detailed the likely ad-tier price ($7-$9 per month), the expected launch date (Nov. 1), the number of new country launches (12), the expected commercial load (4 minutes per hour), the number of expected impressions and even the initial CPM (cost per thousand ad impressions) ask of a whopping $65 per hour," he said.
Netflix Stock Rated Market Perform
Officially, Netflix has said it plans to launch its ad-supported streaming service in early 2023. But the company reportedly has been telling advertisers that it will launch the service in the fourth quarter.
"The details of Netflix's pivot to introduce an advertising tier have been difficult to keep secret," Nathanson said.
Nathanson reiterated his market perform, or neutral, rating on Netflix stock. However, he raised his price target on Netflix stock to 220 from 190.
On the stock market today, Netflix stock rose 0.7% to close at 240.74.
NFLX Stock In Cup-With-Handle Base
"The recent rebound in Netflix's stock price has been mostly driven by positive advertising headlines and growing expectations that this strategic pivot will be able to return the company to stronger growth ahead," Nathanson said.
He added, "We believe that advertising will eventually present a significant revenue source, though perhaps not a narrative-changing one … and maybe nowhere near as high as some of the most recent uber-bullish sell-side forecasts."
In 2023, its first full year of ad service, Netflix could generate $1 billion in advertising revenue, including $700 million from the U.S. and Canada, he said.
Netflix stock has formed a cup-with-handle base with a buy point of 250.59, according to IBD MarketSmith charts.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
