The FAANG stocks are often viewed as powerful, profit-making machines. However, their indestructibility is not guaranteed, and any company will always have more room for improvement. This is particularly pertinent for Netflix, Inc. (NFLX), which has recently been criticized by investors for taking a hard line against advertising. (See Netflix stock charts on TipRanks)
Laura Martin of Needham & Company published an unfavorable report about the massive video streaming service, citing its staunch position against running advertisements, and therefore forfeiting revenues. Netflix has stated that it “will never have ads in its content,” and according to Martin, is essentially “funding its SVOD [subscription video on demand] competitors.”
She derives this hypothesis by suggesting that if Netflix is not courting advertisers, its competitors are getting better prices per ad, thus ultimately raising their revenues. Martin explained that this dynamic is “value-destructive” for Netflix’s investors, and “value-creating” for its competitors.
The five-star analyst rated the stock a Sell, and did not declare a price target. By early Wednesday intraday trading, NFLX was trading at about $531 per share.
Currently, Netflix finds itself surrounded by a bevy of competition, including Hulu and Disney+ (DIS), Peacock (CMCSA), Discovery+ (DISCA), Paramount+ (VIAC), among others.
After making comparisons to similar companies which do advertise to their subscribers, Martin estimates that Netflix is missing out on $8 to $14 billion in revenue each year. In 2020 terms, this would have translated into foregone upside revenues of 32% to 56%.
Netflix contends that placing ads on its service will cause it to lose subscribers. However, Martin calculates that if it were to generate 30-50% more revenue from ads, it would have to lose more than 30-50% of its subscribers in order to take a net loss. She argues that this contingency is highly improbable.
As a solution, the analyst then proposed that Netflix implement an “ad-light” subscription tier. A more moderately-priced tier option would make the company’s service more available to new “price-sensitive consumers.”
Simultaneously, having new ad-based revenue streams would diversify Netflix’s exposure to subscriber loss risk, and would secure its role as a “superior option and direct substitute” for traditional TV.
On TipRanks, NFLX has an analyst rating consensus of Moderate Buy, based on 26 Buy, 7 Hold, and 3 Sell ratings. The average Netflix price target is $611.27, which during intraday trading on Wednesday reflects a potential 12-month upside of 14.82%.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
