If you’re one of the Netflix subscribers who pay $6.99 per month to watch via its Basic With Ads tier, the streamer owes you its thanks: You’re more valuable than the ad-free Standard customers who to pay $15.49 per month.
According to Netflix’s first-quarter earnings report, “Basic with Ads” in the U.S. now brings in more overall revenue per user than the company’s Standard plan. Do the math, and that tells us advertising contributes at least $8.50 in revenue per (U.S.) user to Netflix. (A report in Bloomberg last month put the number of ad-tier subscribers at 1 million.)
As CFO Spencer Neumann said during the senior team’s Q1 earnings interview, “Overall we’re pleased with our per-member ad-plan economics. We really like the path we’re on.”
Who wouldn’t? Neumann called AVOD (advertising-supported video on-demand) Netflix a “win-win” situation. “Basic with Ads” members made the choice to save money; that choices results in more revenue for Netflix. Let’s add another win, since revenue is Netflix’s new top metric; it used to be subscriber numbers.
All of this leaves Wall Street analysts pumped up, despite a less-impressive first-quarter subscriber growth and financial performance. Perhaps no one is more bullish on NFLX than analysts at private-banking firm Wedbush, which on Wednesday added the stock to their “Best Ideas List” where it joins the likes of Apple and Imax.
Wedbush believes Netflix “has reached the right formula with its global content to balance costs and generate increasing profitability,” and thus is maintaining its relatively high (to the market and industry) NFLX price target of $410. NFLX closed Wednesday at $323.12.
Notice that we did not say “Basic with Ads” makes Netflix more money than the other plans. Terms of its deal with Microsoft to sell commercials are not disclosed, but it is generally believed to be a revenue-split — not that any of the media analysts we spoke with for this story believes that split is 50/50. One even suggested Microsoft may have even foregone any revenue simply have the scale that comes with Netflix as your client. Even so, Netflix’s ARPU in the U.S. and Canada declined each of the past two quarters — the ones since “Basic with Ads” launched in November.
Also paying dividends is Netflix’s “paid-sharing” plan, aka the Great Password Crackdown. The rollout, which began in Latin America, migrated up to Canada, and is coming to the U.S. In Canada, the closest comp to America, co-CEO Greg Peters said Netflix has already recovered and then some from any subscriber or revenue impacts. However, risks remain.
“Given the maturity in the U.S. streaming market, weakening economic growth and the plethora of choices, we worry that the password-sharing crackdown in the typically high-churning second quarter is a risky move,” Moffett Nathanson wrote in its Wednesday note. You’ll recall Netflix lost 970,000 subscribers in the second quarter of 2022 vs. 200,000 in the shocking Q1 decline.
Analysts were also pleased to hear about lower-than-expected content budgets for 2023 and 2024. After all, when you’re not spending cash, you’re holding cash — and analysts really, really like that.
Barton Crockett, a Wall Street analyst at Rosenblatt Securities, raised NFLX’s price target (but not its “neutral” rating) by $12 to $357. Researchers at Moffett Nathanson also reinstated a “hold” rating but raised their price by $35 to $350 — that $350 matches Australian financial services group Macquarie’s ongoing target. Investment-banking advisory firm Evercore ISI still has NFLX as a “buy” and still at $400, which is the same price for equity analysts at Wells Fargo.
So if it’s all good, why are shares in NFLX not taking off? Shares have declined more than $10 from Tuesday’s close (ahead of the company’s earnings) because Netflix came in low on subscriber adds in Q1 (1.75 million vs. a consensus forecast closer to 2 million; Netflix added just 100,000 member in the U.S. and Canada). The company also revealed disappointing revenue and earnings estimates for Q2. (It’s worth pointing out that analyst price targets are often for as much as 12 months out.)
And maybe, some traditional investors are broken up over Netflix shuttering its legacy DVD business. But probably not that one.