Netflix shares have tumbled more than 70% in a tech meltdown, due in large part to the streaming video giant’s disastrous first-quarter earnings report, which raised new questions about the company’s ability to grow its subscriber base from here on out. Huh.
Among other things, the company said it lost 200,000 net customers in the March quarter—and forecast a further two million losses in the June quarter.
On the company’s Q1 earnings call, Netflix (ticker: NFLX) CEO Reed Hastings made the surprise announcement that the company is exploring ways to add low-cost ad-supported subscription tiers as a way to reach new audiences—and others. competing with services. Similar approach has been adopted.
The company also noted that it was looking at ways to crack down on password sharing, adding that in addition to the 222 million paying households, another 100 million see the service using shared accounts.
In a research note Tuesday, Citi analyst Jason Bazinet made a case for how adopting an advertising model has the potential to increase free cash flow growth and revive investor interest in the stock.
BazzNet notes that Netflix shares currently lack a clear investor base. “Once Netflix’s sub base began to shrink, investors stopped viewing the firm as a growth stock,” he writes. “But, given the lack of” [free cash flow]Value investors are unsure how to assess the firm.”
BazzNet thinks the company has two options: offering a lower-cost ad tier, or monetizing the account sharing.
In a detailed analysis in their new report, BazzNet explains why they don’t believe the moratorium on password sharing has a big payoff in terms of free cash flow. But it’s excited to add an ad-based service tier.
If Netflix can generate $10 of advertising revenue per US user in a month of the low-priced service, he says, the company could cut its price by $6 a month and still get incremental revenue from those users. Can generate revenue that now pays for a company’s base-level service. , at $9.99 per month. He sees the potential for incremental free cash flow of between $900 million and $3.6 billion in the domestic market.
Outside the US, BazzNet forecasts the potential for $3 per month in ad revenue, which they say should allow Netflix to offer the service at $6 per month, which now averages $10. He sees the approach as widespread adoption and growing free cash flow to between $800 million and $3.1 billion per year.
there are reports That Netflix may launch an ad-supported tier before the end of 2022, which will be faster than implied on Hastings’ recent earnings call.
There is some irony in BazzNet, which released its report on the day that the ad-supported internet sector is being crushed by warnings of earnings from Snap (SNAP). But there’s no doubt that Netflix is now ready to offer an ad-supported version of the service. Expect more details when the company reports second-quarter results in late July.
Bazinet has maintained its buy rating on Netflix shares and a target of $295.
Netflix did not immediately respond to a request for comment on when it might add the ad-supported ad level.
Netflix fell 4.6% to $178.84 on Tuesday, amid a broad sell-off in tech stocks triggered by disappointing news from Snap.
Eric J. Write Savitz to [email protected]
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