Do you watch ads on Netflix? It’s worth an extra $8.50 a month

April 20, 2023

Netflix’s most valuable user is an American who will sit through the commercials.

If you’re one of those Netflix subscribers who pay $6.99 a month to watch through the Basic With Ads tier, the streamer owes you a favor: You’re worth more than ad-free regular customers who pay $15.49 a month.

According to Netflix’s first-quarter earnings report, “Basic with Ads” in the U.S. is currently bringing in more total revenue per user than the company’s regular plan. Do the math, and it says that advertising also contributes at least $8.50 in revenue (US) per user for Netflix. (A Bloomberg report last month put the number of ad tier subscribers at 1 million.)

As CFO Spencer Neumann said in the executive team’s first quarter earnings interview, “Overall, we’re pleased with the economics of our per-member advertising plan. We really like the road we’re on.”

Who wouldn’t? Neumann called AVOD (ad-supported video on demand) Netflix a “win-win” situation. “Basic with Ads” members chose to save money; that the election will generate more revenue for Netflix. Let’s add another win as revenue is Netflix’s new high point; they used to be subscriber numbers.

All of this has Wall Street analysts fired up, despite less than impressive subscriber numbers and financial performance in the first quarter. Perhaps no one is more bullish on NFLX than analysts at private banking firm Wedbush, which added the stock to its “Best Ideas List” on Wednesday, where it joins Apple and Imax.

Wedbush believes that Netflix has “hit the right formula with global content to balance costs and generate incremental profitability,” and maintains a relatively high (for the market and the industry) price target on NFLX at $410. NFLX closed at $323.12 on Wednesday.

Notice we didn’t say “Basic with Ads” makes Netflix more cash like other plans. Terms of the ad sales deal with Microsoft have not been disclosed, but it’s generally believed to be a revenue split — not that any of the media analysts we spoke to for this story think the split is 50/50. One even suggested that Microsoft might have given up Any revenues are simply as scaled as Netflix is as a customer. Still, Netflix’s ARPU has declined in the U.S. and Canada over the past two quarters — since the launch of “Basic with Ads” in November.

Ramit Sethi in the Netflix series “How to Get Rich”.

Courtesy of Netflix

Also paying dividends is Netflix’s “paid sharing” plan, also known as the Great Password Crackdown. The rollout that started in Latin America has moved to Canada and is coming to the United States. In Canada, the closest country to America, co-CEO Greg Peters said Netflix has recovered, with some subscriber or revenue impacts. However, risks remain.

“Given the maturity of the U.S. streaming market, weakening economic growth and the abundance of choices, we fear that cracking down on password sharing in a typically tumultuous second quarter is a risky move,” Moffett Nathanson wrote in a note Wednesday. You’ll recall that Netflix lost 970,000 subscribers in the second quarter of 2022, down from 200,000 in the shocking first quarter.

Analysts were also pleased to learn that we are talking about a lower-than-expected content budget for 2023 and 2024. After all, if we’re not spending cash, we’re holding cash—and analysts really, really like that.

Rosenblatt Securities Wall Street analyst Barton Crockett raised his price target (but not a “neutral” rating) on NFLX by $12 to $357. Researchers at Moffett Nathanson also restored a “hold” rating, but raised their price target by $35 to $350 – $350, which is in line with Australian financial services group Macquarie’s current target. Investment banking consultancy Evercore ISI maintains a “buy” rating on NFLX and remains at $400, which is the same as Wells Fargo stock analysts.

So if all is well, why isn’t NFLX stock going up? Shares were down more than $10 from Tuesday’s close (ahead of the company’s earnings) as Netflix reported low subscriber growth in the first quarter (1.75 million, versus the consensus estimate of close to 2 million; Netflix only had 100,000 added a member in the United States and Canada). The company also reported disappointing revenue and profit estimates for the second quarter. (It is worth noting that analyst price targets are often valid for up to 12 months.)

And some traditional investors may be upset about Netflix closing its legacy DVD business. But it probably isn’t.

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