Netflix Stock Could Be About To See A Massive U-turn

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This article originally appeared on Fool.com. All figures are in US dollars unless otherwise specified.

It was a terrible year for netflix (NASDAQ:NFLX) investors. A sudden loss of paying subscribers weighed heavily on the stock, which has lost more than 60% of its value so far in 2022. But the streaming giant could see a major turnaround in its fortunes sooner rather than later.

Netflix announced earlier this year that it plans to introduce an ad-supported subscription plan on top of its existing tiers. The plan was supposed to go live in 2023, but reports suggest Netflix may have moved the timeline forward to stem its subscriber losses. It is highly expected that the ad-supported tier can be launched as early as November 1st.

Although the company is tight-lipped on the updated schedule, it expects 4.4 million subscribers on its ad-supported platform by the end of the year. However, JP Morgan Analyst Doug Anmuth believes this is just the beginning, and the introduction of an ad-supported tier could accelerate Netflix’s long-term revenue growth.

An ad-supported plan could be a game-changer

Anmuth estimates that 7.5 million subscribers could opt into the ad-supported plan in the United States and Canada by 2023, helping Netflix generate $600 million in ad revenue. Although this is only a small part of Netflix’s revenue given that the company generated $31 billion in revenue over the past 12 months, ad revenue is expected to increase significantly over the long term.

The JPMorgan analyst sees the ad-supported plan generating $2.65 billion in advertising revenue by 2026 thanks to a strong subscriber base of 22 million. Global numbers are expected to be much higher. Netflix estimates it could have 40 million ad-supported subscribers worldwide by the end of 2023, up sharply from its 2022 estimate of 4.4 million. Omdia market research estimates that 60% of Netflix’s global subscriber base could be on an ad. -level supported by 2027.

The company could generate 14% of its global revenue from advertising sales after five years, up from just 1% in 2023. It remains to be seen how much revenue this new plan could bring to the company in the long run, but it doesn’t. Wouldn’t be surprising to see an ad-supported plan become a major growth engine for Netflix for two simple reasons.

Why this move could be a masterstroke

The first reason why an ad-supported plan could accelerate Netflix’s growth is that it could make the company’s plans more accessible. Reports suggest that Netflix could price the new plan between $7 and $9 per month. This could offer customers a nice alternative to the company’s most popular plan, which costs $15.49 per month.

Netflix’s basic plan is priced at $9.99 per month, and the premium plan costs $19.99 per month in the US. But users are said to be tired of the company’s regular price increases – as well as soaring inflation – and these factors could cause them to leave the platform. So introducing an ad-supported tier that undermines Netflix’s basic plan could bring the company a sigh of relief and help it stop subscriber sheds.

Additionally, the company will now be in a better position to compete with its rivals with a more aggressive pricing strategy. This could give Netflix a better chance of restoring subscriber growth and strengthening its presence in the growing video streaming market, which is expected to reach $139 billion in revenue by 2027, a substantial increase from the previous year. estimated $80 billion this year.

However, it’s the second factor that I think could be a bigger growth driver for Netflix. The company had nearly 221 million paid subscribers in the second quarter of 2022. The streaming platform also has high user engagement. In 2020, Netflix users reportedly consumed 3.2 hours of video content per day, compared to an average of two hours before the pandemic.

Assuming Netflix’s average daily user video consumption has declined to pre-pandemic levels, given its massive user base, the company still provides a robust platform to engage digital advertisers. Netflix could therefore be on the verge of entering a gigantic market, as video ad spending is expected to reach $180 billion this year. By 2027, annual video ad spending could reach $318 billion, which would be well above what the streaming video market is expected to generate.

As such, the digital advertising market could open up a whole new frontier of growth for Netflix. Analysts currently expect the company to grow by just 8.8% annually over the next five years, but it could do much better than that as it has more than just the video streaming services market to tap into now. And with stocks trading at just 20 times earnings, compared to Netflix’s five-year average multiple of 104, investors can consider hoarding this tech stock today.

This article originally appeared on Fool.com. All figures are in US dollars unless otherwise specified.

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