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The Ratings Game: Netflix investor sentiment picking up ahead of new ad-supported tier, analyst says

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Netflix Inc.’s stock has underperformed the broader stock market by a wide margin this year, but the forthcoming launch of its new advertising tier is starting to get the attention of investors.

The streaming giant’s shares
NFLX,
+0.00%
,
which fell 0.5% in morning trading Wednesday, have rallied 7.7% since Netflix reported second-quarter results in July. “Our discussions suggest investor sentiment & interest—while still mixed—are picking up toward the launch of the ad-supported subscription tier, likely in 4Q,” wrote J.P. Morgan analyst Doug Anmuth in a note to clients.

The stock has tumbled 64.0% this year, but has soared 29.6% over the past three months, while the S&P 500 index
SPX,
+0.56%

has dropped 17.2% year to date and has gained 5.6% over the past three months.

See Now: Netflix stock nabs an upgrade as company plans its advertising tier

Netflix is preparing to launch its new ad-supported business, also known as Advertising-based Video on Demand (AVOD).

“Our lower priced advertising-supported offering will complement our existing plans, which will remain ad-free,” said Netflix, in a letter to shareholders when it released its second-quarter results. The company was targeting an early 2023 launch for the service, but has now moved this up to November, reports Variety, citing industry sources.

Two top Snap Inc.
SNAP,
-2.68%

ad executives recently jumped to Netflix ahead of the launch of the ad-supported tier.

“We continue to believe NFLX has urgency around both accelerating revenue growth and increasing [free cash flow], and the recent hires of Jeremi Gorman & Peter Naylor from Snap should provide greater confidence in monetizing the ad tier,” writes J.P. Morgan’s Anmuth. 

See Now: Two top Snap ad executives jump to Netflix ahead of launch of ad-supported tier

J.P. Morgan has a $240 price target and neutral rating for Netflix.

Not all on Wall Street are so optimistic about AVOD, as Benchmark analyst Matthew Harrigan believes the stock’s recent rally may be tapped out. The analyst also discussed the possibility of Netflix “hubris” around AVOD pricing.

“We acknowledge Netflix’s AVOD effort could deliver 20 points+ in upside with exemplary execution, although early indications are Netflix is unrealistically aggressive on pricing given vanilla ad feature capabilities especially personalization versus peers and inadequate performance measurement,” he writes.

See Now: ‘The Crown’ interest surges on Netflix after death of Queen Elizabeth II

Although pricing for the new service has not yet been revealed, Harrigan thinks that Netflix may have “unrealistic” expectations in what he describes as an uncertain market. Citing Insider, he writes that Netflix is reportedly demanding a $65 CPM from advertisers. CPM, which stands for Cost per Mille, or cost per thousand, is the rate that an advertiser pays per thousand views or impressions of an ad. A $65 CPM is more than double the $20 to $30 pricing of Hulu and Amazon.com Inc.’s
AMZN,
+0.61%

Amazon Prime, according to Harrigan, again citing Insider.

“Although there have been some premature and inaccurate reports on member pricing and other details, Netflix’s early November AVOD launch timing for the U.S., U.K., Canada, France and Germany is an apparent response to Disney+’s December debut,” he writes. “The compressed launch timing has Netflix simply running traditional linear video ads with de minimis targeting and nil personalization.”

Benchmark has a $157 price target and sell rating for Netflix.

Of 45 analysts surveyed by FactSet, 12 have the equivalent of a buy rating on Netflix’s stock, 27 have a hold rating and six have the equivalent of a sell rating.

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