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Analyst says Netflix investor sentiment is improving ahead of new ad-supported tier

Netflix Inc. stock has significantly underperformed the broader stock market this year, but the impending launch of its new advertising tier is beginning to grab investor attention.

Streaming giant NFLX shares
+2.75%,
which fell 0.5% on Wednesday morning is up 7.7% since Netflix reported second-quarter results in July. “Our discussions indicate that investor sentiment and interest – albeit still mixed – is improving towards the launch of the ad-supported subscription tier, likely in Q4,” wrote Doug Anmuth, analyst at JP Morgan, in one Notice to Customers.

The stock is down 64.0% this year but is up 29.6% over the past three months, while the S&P 500 index SPX,
+0.34%
is down 17.2% year-to-date and has gained 5.6% over the past three months.

See now: Netflix stock grabs an upgrade as the 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 ad-supported offering will complement our existing plans, which will remain ad-free,” Netflix said in a letter to shareholders when it released its second-quarter results. The company was targeting an early 2023 launch of the service but has now pushed that back to November, Variety reports, citing industry sources.

Two Pointed Snap Inc. SNAP,
-2.12%
Ad executives recently jumped to Netflix ahead of the launch of the ad-supported tier.

“We continue to believe there is an urgent need for NFLX to both accelerate and scale revenue growth [free cash flow]and the recent hiring of Snap’s Jeremi Gorman and Peter Naylor should inspire more confidence in ad-tier monetization,” writes JP Morgan’s Anmuth.

See now: Two top Snap ad executives are jumping to Netflix ahead of the launch of the ad-supported tier

JP Morgan has a price target of $240 and a neutral rating on Netflix.

Not everyone on Wall Street is so bullish on AVOD, as benchmark analyst Matthew Harrigan believes the stock’s recent rally could be exhausted. The analyst also discussed the possibility of Netflix “hubris” over AVOD pricing.

“We recognize that if executed well, Netflix’s AVOD effort could deliver more than 20 points of upside, although early evidence suggests that given the capabilities of vanilla ads features, particularly personalization versus peers, and a inadequate performance measurement is unrealistically aggressive in pricing,” he writes.

See now: Interest in ‘The Crown’ on Netflix soars after Queen Elizabeth II’s death

Though pricing for the new service hasn’t been announced yet, Harrigan believes Netflix may have “unrealistic” expectations in a market he describes as uncertain. Citing insiders, he writes that Netflix reportedly charges advertisers a CPM of $65. CPM, which stands for cost per mille or cost per thousand, is the rate an advertiser pays per thousand views or impressions of an ad. A CPM of $65 is more than double the price of $20-$30 from Hulu and AMZN from Amazon.com Inc.
+1.36%
Amazon Prime, according to Harrigan, again citing insiders.

“While there have been some premature and inaccurate reports on membership pricing and other details, Netflix’s AVOD launch date in early November for the US, UK, Canada, France and Germany is an apparent reaction to Disney+’s December debut,” he writes . “Due to the compressed launch time, Netflix just serves traditional linear video ads with de minimis targeting and zero personalization.”

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

Out of 45 analysts polled by FactSet, 12 have the equivalent of a buy rating on Netflix stock, 27 have a hold rating and six have the equivalent of a sell rating.

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