Netflix’s Ad-Supported Future: JPMorgan Predicts a "Significant" Rise
Netflix is poised to become a major player in the advertising landscape, according to JPMorgan. The firm maintains an "overweight" rating on Netflix, calling it a top pick due to its projected mid-teens revenue growth in 2023 and 2024, expanding margins, and strong free cash flow generation. JPMorgan’s price target of $750 reflects a 9% upside from Thursday’s closing price.
Analyst Doug Anmuth forecasts a significant boost in scale and ad monetization for Netflix by 2025. He anticipates 31 million ad-tier subscribers by year-end 2025, growing to 42 million by the end of 2026. Anmuth estimates advertising revenue excluding subscriptions to contribute at least 10% of Netflix’s total revenue by 2027.
Key Takeaways
- Netflix to emerge as a significant advertising player: The company’s focus on ad formats, its in-house ad tech platform, and strategic partnerships aim to drive strong ad monetization.
- 31 million ad-tier subscribers by year-end 2025: Ad tier subscriptions are expected to reach significant scale, becoming a major revenue driver for Netflix.
- Advertising revenue to contribute 10% of total revenue by 2027: This indicates a significant shift in Netflix’s revenue mix toward advertising income.
- Shifting subscriber base to ad-supported plan: The attractiveness of the lower-priced ad-tier plan, coupled with the company’s crackdown on password sharing, is anticipated to drive a migration from the basic plan to the ad-supported tier.
Navigating the Challenges: Building An Ad-Based Business
While Netflix’s ad-supported plan holds promising potential, the company faces several challenges in building an ad-supported business from scratch. Notably, it’s competing with established players in a crowded digital advertising market.
"There are challenges as NFLX is building its Ad Tier from scratch, there are only a handful of strong, scaled digital ad platforms, & advertising is not in NFLX’s DNA, but we expect monetization to build through strong multi-year execution," Anmuth noted in Friday’s report. Despite these hurdles, JPMorgan expects Netflix to achieve critical scale in each ad market by 2024.
Netflix’s Ad-Tier Expansion: A Strategic Play
Netflix launched its ad-supported plan in November 2022, a direct response to a decline in subscriber growth. The company lost subscribers for the first time in over a decade, driven by increased competition and the global shift towards streaming services.
The launch of the ad-supported plan, alongside the crackdown on password sharing, represents Netflix’s strategic response to these challenges. This year, Netflix shares have rallied more than 41%, reflecting investor confidence in the company’s ability to navigate these changes and capitalize on the evolving streaming landscape.
Growth Prospects: Scale, Pricing, and Bundling
JPMorgan highlights several key factors that will drive Netflix’s ad-supported growth:
1. Scale through subscriber migration: The firm anticipates a significant shift of U.S. subscribers from the basic plan to the ad-supported tier. This migration, driven by the attractive pricing of the $6.99 ad-supported plan and the crackdown on password sharing, will significantly increase the ad-tier subscriber base.
2. Elevated Pricing Strategy: While Netflix primarily leverages advertising revenue, the company also plans to increase prices for its ad-free premium subscription levels. This strategy will further diversify revenue streams, contribute to margin expansion, and create a more competitive pricing structure.
3. Strategic Bundling & Content Expansion: Netflix is expanding its offerings, including bundling its streaming services with other entertainment platforms and investing in live event content. This strategic bundling will attract new subscribers, further increase scale, and create a diversified revenue stream.
Conclusion: A Shift Towards Advertising Growth
Netflix’s foray into advertising represents a significant shift for the streaming giant, one that could redefine its revenue model and growth trajectory. While challenges remain, JPMorgan’s bullish outlook points to a promising future. With a focus on expanding scale, improving ad formats, and forging strategic partnerships, Netflix has the potential to become a major player in the advertising industry. This shift towards advertising, coupled with its ongoing efforts to diversify content and pricing strategies, indicates that Netflix is well-positioned to navigate the evolving streaming landscape and continue its growth trajectory.
