Stock Analysis & Ideas

Netflix Partners With Microsoft; Analyst Predicts Turbulence

Story Highlights

Needham analyst Laura Martin was surprised by Netflix’s collaboration with Microsoft for its ad-supported tier. The analyst believes this move will delay the launch of Netflix’s ad-supported tier. In addition, she also listed other implications of this deal. With NFLX stock down by more than 70.7% this year, is further price weakness on the cards?

Netflix’s (NASDAQ: NFLX) deal with Microsoft (MSFT) for its ad-supported tier has not gone down well with Needham analyst Laura Martin, who said that the deal will delay the launch of NFLX’s ad-supported tier.

More worryingly, the analyst expects “12 months of share price weakness from here.” Martin remained sidelined on the stock with a Hold rating.

Shares of Netflix have already cratered 70.7% this year.

On Thursday, Netflix announced that it had picked Microsoft as its partner to develop its ad-supported tier. Analyst Martin pegged the deal as a “surprise move” and listed some implications for Netflix from the deal.

The Launch of Netflix’s Ad-Supported Tier to Get Delayed

The analyst was of the view that this deal could prove to be bad for Netflix as, by Martin’s estimate, Netflix would not be able to launch an ad-supported tier before the third quarter of next year. Wall Street was hoping that Netflix would be able to generate advertising revenue by the fourth quarter of this year, as the company is struggling right now.

Netflix’s subscriber losses have been a cause of worry for investors. In Q1, Netflix lost around 200,000 subscribers with a slowing pace of growth. At the end of Q1, the streaming giant had 221.6 million global memberships with a growth of 6.7% year-over-year.

Analyst Martin also pointed out that it was expected that Netflix and Disney+ (DIS) would both launch their ad-supported tiers this year, resulting in hurting cost per thousand views (CPMs) for other connected-TV (CTV) players like Roku (ROKU).

But Netflix’s decision to partner with MSFT mitigated this worry and was good for the connected-TV ecosystem.

Netflix’s Deal with MSFT Seems Relationship-Based

Martin opined that considering that Netflix’s Co-Founder, Chairman, President, and Co-CEO, Reed Hastings, had served on the Board of Microsoft from 2007 to 2012, it is likely that “this deal was negotiated at the highest level of these two companies, rather than at the execution level of current AdTech incumbents that could expedite time-to-market.”

Moreover, the analyst pointed out that Netflix is averse to using or buying products or services from external sources – a “not invented here” bias. As a result, “using MSFT they may be able to create from scratch a unique product that is different from CTV offerings in the market today.”

Martin stated that it remained to be seen whether this strategy would pay off for NFLX. The analyst was also puzzled by NFLX’s decision to choose an ad partner before hiring its advertising head and termed it an “out of order” move.

Takeover Agenda Behind the NFLX-MSFT Deal?

Martin wondered whether Netflix may be looking at Microsoft as a potential acquirer. Elaborating further on this line of thought, the analyst pointed out that awarding Microsoft this deal “forges a closer relationship and takes the first step toward that potential outcome.”

The analyst added, “No other company NFLX could have chosen as its SSP [supply side platform] (e.g., Roku, Magnite, etc) would have been large enough to buy NFLX.”

Wall Street analysts also side with Martin and are sidelined about Netflix with a Hold consensus rating based on 10 Buys, 25 Holds, and six Sells. The average Netflix price target of $263.33 implies an upside potential of 50.6% at current levels.

Bottom Line

Considering that Netflix’s deal with Microsoft could lead to a delay in the launch of its ad-supported tier, it remains to be seen how NFLX will navigate its way out of the tough competition and overall macro volatility.

Currently, even Netflix’s website visits are not very encouraging. According to the TipRanks Website Traffic tool, total unique visitors on all devices were down 16.6% year-over-year in Q2. Learn how Website Traffic can help you research your favorite stocks.

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