Netflix Will Likely Take Time to Scale – UBS

By Sam Boughedda 

Netflix (NASDAQ:) announced its long-awaited ad-tier subscription plan on Thursday, sending its shares over 5% higher.

Following the news, Raymond James analysts told investors, “Netflix is moving faster than originally expected when the company first announced that it was exploring an ad-supported tier, and anticipation has been steadily building.”

The analysts, who maintained a Market Perform rating on the stock, added: “Our analysis suggests potential ARPU upside from the ad tier as currently outlined, but wide variance in key inputs including CPM rates and user engagement suggest that the benefit is not certain. Following the announcement, we expect near-term downside in the stock is relatively limited (barring a material breakdown in 3Q subscriber trends), but we remain on the sidelines until we see in-market evidence that the ad tier is resolving concerns around competition eating away at Netflix’s opportunity.”

Elsewhere, analysts at UBS stated they believe Netflix’s new ad-supported tier will “be accretive to LT revenues & profitability but the business will likely take time to scale.”

“We believe new ad tiers with features more akin to the premium plans could eventually be introduced. Mgmt suggested the plan will be ARPU neutral to positive vs. the basic tier, implying a $3+ Ad ARPU in the U.S. This is likely conservative given high engagement for Netflix today (30%+ vs. Hulu) and expect monetization to improve as subs scale & targeting/measurement is enhanced,” added the analysts, who maintained a Neutral rating.

In a note on Netflix’s earnings to be released next week, Monness, Crespi, Hardt told investors that although Netflix continues to deliver a strong slate of content, and the stock’s valuation has “become unassuming after a sharp decline, the company’s business is under siege on multiple fronts, the time necessary to successfully monetize new initiatives is unclear, and we believe the darkest days of this economic downturn are ahead of us.”

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