Netflix (NFLX 0.10%) is gearing up to launch a more economical ad-based version of its popular streaming service in the coming months. Wall Street can't seem to agree if the move will be a success.
A pair of analysts issued fresh notes on Wednesday. Matthew Harrigan at Benchmark feels that Netflix is pricing its spots for marketing missives too high for potential advertisers. A more upbeat Doug Anmuth at J.P. Morgan believes investor interest in the stock is starting to pick up ahead of the new platform tier's launch. Let's take a closer look at the two very different camps.
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Bears go first
Harrigan's concern stems from the stiff ransom that Netflix is reportedly commanding from potential advertisers. The Wall Street Journal was reporting two weeks ago that Netflix is charging $65 per 1,000 impressions, according to an unnamed ad buyer. Paying less than $0.07 to reach a single home may seem like a steal, but regular TV ads can be purchased for as little as a penny per home.
One can argue that an ad on Netflix deserves a healthy market premium. It's an audience that typically doesn't see many ads, so they will stand out -- at least initially. The new Netflix tier will reportedly cost a lot less than the ad-free version, but it's still likely to be a juicy target audience for marketers. Netflix isn't likely to load as many ads into its new tier as traditional TV networks.
However, the ad-serving platform itself hasn't impressed the Benchmark analyst. He argues it's lean in terms of feature capabilities and performance measurement tools relative to its peers. It remains to be seen if Netflix or its ad partner Microsoft can beef up the marketing platform ahead of its launch.
Harrigan's bearishness isn't limited to just the upcoming ad tier. He has a sell rating on the stock, and his $157 price target is 28% below where Netflix closed on Tuesday.
NASDAQ: NFLX
Key Data Points
The counter
Anmuth at J.P. Morgan has a rosier view of Netflix's latest chess move. He feels the streaming video pioneer senses the urgency to accelerate revenue growth while also boosting its free cash flow. He believes that recent hiring moves to beef up its ad-based monetization should make investors confident about the new tier.
Anmuth isn't officially bullish. He has a neutral rating on the stock, but his $240 price target is a premium to where the shares are now. He sees investor sentiment improving since this summer's earnings report, largely on the open-ended potential of the new tier. After back-to-back quarters of sequential declines in global subscribers, Netflix had to try something new. It makes sense to introduce a lower-priced ad-supported tier instead of sacrificing the integrity of what could've been an ill-advised price hike to $15.49 a month for its flagship tier earlier this year.
Netflix has said the service won't launch until next year, but some are reporting the test market could launch later this year. A lot can still change between now and then in terms of pricing for advertisers, features on the market platform, and the viewer experience. Netflix continues to be the top dog among streaming media stocks in terms of revenue from premium streaming services. Don't underestimate its chances to get this one right.
