Netflix (NASDAQ:NFLX)
On a mixed day for the Communication Services sector, Netflix stock rose on analyst optimism about the company’s advertising potential and its recent crackdown on password sharing.
This comes after Netflix (NASDAQ:NFLX) unveiled its paid account-sharing strategy in the crucial U.S. market (and dozens more) and gave its first-ever advertising upfront presentation a few weeks ago. This huge update prompted a double-digit increase in Netflix stock.
J.P. Morgan has raised its revenue and operating income projections in light of the expanded paid-sharing possibility. The corporation had previously projected that 100M customers throughout the globe were tapping into an already established and paid-for account to make a loan.
Analyst Doug Anmuth predicted that by the end of 2023, Netflix will generate revenue from 14.0 million users, 26.0 million users in 2024, and 33.2 million users in 2025. New subscribers/net additions and lower-priced paid-sharing “extra members” (who do not qualify as net additions) will “roughly split” those monetized borrowers.
Meanwhile, he predicted that in 2023 and 2024, around 54% of the new members will choose the company’s advertising-supported tier.
According to Anmuth, paid sharing income will be $2.4 billion in 2024 and $3.5 billion in 2025, and he is increasing revenue projections across the board by 4% in 2024 and 6% in 2025. He also projected operating income growth of 6% in 2024 and 9% in 2025.
After the upfront, he felt “incrementally positive,” albeit not so much about advertising as about the smoother implementation of paid sharing.
What’s happening now is that NFLX has made it easier to communicate with sharers and borrowers (and even non-sharing members) and lessened worries about access while away from home, as Anmuth put it.
He has set a price goal of $470, which is higher than the company’s price target of $380, assuming additional gains.
Wells Fargo, however, is betting on the ad tier by increasing its Netflix price target to $500 (a Street high), which would indicate an additional 24% growth.
U.S. advertising is “unique, arcane, and still pretty analog,” expert Steven Cahall has stated. With most of the market secured in upfronts, he estimated that around $8.7B was available, adding, “Brands are hooked on linear.”
“However, as scale grows through paid sharing and, eventually, new tiers, we think advertisers will treat the larger inventory like linear: Some of it will be premium, and some will be volume,” he said.
Although he has some reservations about NFLX’s advertising strategy, we still believe the company is increasing customer value. We now know that optimizing for maximum ARPU is different from optimizing for maximum revenue and that increasing the size of an advertising campaign should improve profitability for business owners.
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