What happened
Shares of Netflix (NFLX -9.09%) jumped on Thursday, surging as much as 8.6%. As of 11:23 a.m. ET, the stock was still up 7.9%.
The catalyst that drove the streaming pioneer higher was news that the company's ad-supported tier is showing promise, after a lackluster debut.
So what
Netflix introduced its Basic with Ads plan -- the company's advertising supported tier -- six months ago. At the time, investors were concerned existing subscribers would trade down to the lower-priced plan, but that hasn't played out. When the company provided an update in a virtual meeting with advertisers, Netflix reported that its advertising business is finally gathering steam. The ad-supported tier has hit 5 million monthly active users, after reporting just 1 million in March.
Perhaps as importantly, the lower-cost tier appears to be attracting users that are entirely new to Netflix's platform, with more than 25% of new subscribers selecting the Basic with Ads plan. As this viewer base grows, Netflix will be able to command higher advertising rates, boosting its revenue in the process.
Co-CEO Ted Sarandos noted that the company is "generating global audiences that are many times bigger than our closest competitors." Co-CEO Greg Peters added, "The signals are promising: engagement on our [Basic with Ads] plan is similar to our comparable non-ads plans." He also said there was "plenty of runway ahead of us," noting that Netflix represents just 10% of total TV viewing, even in its most saturated markets.
Now what
Netflix is beginning to gain scale for its lower-priced ad-supported plan, but it won't yet move the needle on the company's finances. With 5 million subscribers, the company will collect roughly $419 million annually from the ad-supported tier, a pittance compared to the $31.6 billion in revenue it generated in 2022. Furthermore, management has thus far been mum about how much it makes from the advertising shown on its platform, so it's not yet clear what impact this will ultimately have on its results.
That said, this is great news for Netflix investors. Slowing growth among its more expensive tiers had shareholders concerned that the company's best days of growth were in the past. This data suggests that, given time, advertising could be Netflix's next big growth engine.
