Netflix’ (NFLX) ad-supported tier appears to be delivering the goods. Last week, the company said monthly active users (MAUs) for its ad tier had surpassed 23 million. That represents a big jump over the 15 million recorded in November. In May, the ad-supported tier had only 5 million subs.
The accelerating pace of ad subs, says Oppenheimer analyst Jason Helfstein, indicates that Q4 net adds should come in above both the guide and Street expectations. Helfstein is calling for 10 million consolidated net adds in Q4, compared to consensus at 8.7 million.
Using the three announced data points for ad-supported users, Helfstein reckons ~0.7 million MAUs/month were added in 1Q23, followed by 1.25 million in Q2, 1.6 million in Q3 & 2.6 million in Q4. The 5-star analyst also thinks that “inflected” to 4 million MAU adds/month in December and January. “Over the medium-term,” says Helfstein, “we believe the pace of acceleration suggests plenty of room for sub growth in 2024.” At the end of the year, Helfstein expects ad-supported MAUs of 51 million.
This is all an indication that the bull thesis is strengthening. “While accelerating sub growth is positive, the faster NFLX reaches scale in advertising, the faster ARM (average revenue per membership) levels reset higher,” Helfstein explained. The good thing about advertising is that it has “significant incremental margins.” With Helfstein now anticipating $6 billion of ad revenue in 2025, factoring in a “conservative” 80% margin, this suggests $4.8 billion of incremental EBITDA compared to the total of $7.3 million in 2023E.
“This should then allow cash content spend of $19.5/$21B in ’25/’26 vs. $17B guidance, leaving ~$17.5B of cash after $14.5B of buybacks,” Helfstein noted. “Either NFLX can increase their content moat, repurchase more stock or both.”
The upshot of all the above is a new price target. Helfstein’s objective moves from $475 to $600, now suggesting shares will post growth of 22% over the coming year. Helfstein’s rating stays at Outperform (i.e., Buy). (To watch Helfstein’s track record, click here)
That said, the Oppenheimer take is one of the Street’s most optimistic ones. The average price target currently stands at $491.10, practically the same price the shares are currently going for. Rating wise, the stock receives a Moderate Buy consensus rating, based on 25 Buys, 9 Holds and 1 Sell. (See Netflix stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
