Netflix Inc. NFLX shares are down 63.7% so far in 2022 as the streaming giant's revenue growth has continued to slow down to the single digit percentage range.
Netflix investors are now hoping that the company's pending launch of a lower-cost, ad-supported tier in early 2023 will bolster the slumping stock. However, one analyst issued a warning: Don't count on advertising to provide much support for Netflix anytime soon.
The Analyst: Bank of America analyst Nat Schindler reiterated his Underperform rating and $196 price target for Netflix.
The Thesis: Netflix's transition to an advertising video on demand (AVOD) model may be more challenging than investors realize. The company tested different cost per thousand (CPM) rates, ad loads and advertising minutes. And media reports suggesting Netflix can command $65 CPMs are simply unrealistic, Schindler says.
Ad-supported services typically start with low ad loads and slowly raise those loads over time to drive growth, Schindler explained. Netflix, however, is a premium service that will need to make up for lost subscription revenue with its new ad business. If Netflix starts with too low of an ad load, Schindler said it risks its premium subscribers trading down.
In addition, Netflix's massive audience and engagement numbers could shock the entire online advertising market, driving already weak CPMs down even further for all players involved, he added.
Netflix is currently trading at a price-to-free cash flow multiple of about 200 compared to an average P/FCF of about 15 for slower-growth AVOD media peers.
"We believe this is a steep price to pay for a company currently in flux amid a weakening backdrop for advertising along with a highly competitive AVOD/OTT environment," Schindler said.
Benzinga's Take: Netflix is no longer the high-valuation, high-growth stock it once was. Yet, it isn't exactly cheap for a company growing at the 8.5% rate it reported in the most recent quarter. Advertising growth could help get Netflix back on track in 2023, but Schindler's note suggests investors shouldn't assume advertising will be the bullish catalyst Netflix needs.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.