Netflix is feeling the heat. Recently, NFLX stock dropped from $700 to $400/share, has lost over 40% of its value in the last three months, and is down about 32% overall this year. The cause of the decline is a question on just how big the streaming market can be.
Aside from this, Needham’s Laura Martin believes the company faces multiple headwinds.
Martin predicts that churn rate will increase, Netflix will “mix shift toward lower ARPU (average revenue per user) geographies,” and Netflix’s current strategy will be the reason behind its downfall. The solution? Martin thinks Netflix needs to offer a “separate, lower-priced, ad-driven tier, like almost all its streaming competitors” or to sell all together.
This isn’t the first time that Laura Martin has called for an ad-supported tier. Actually, she’s been recommending it for at least two years now. In the summer of 2021, the Needham senior analyst said, “Nothing is getting better for Netflix, and it’s not a part of the reopening trade as it is not ad-driven. And advertising is going to be huge over the next twelve months. So, we’d rather be with the ad-driven tech stocks.”
Those previous calls have followed continued growth by Netflix and the ability to raise price without much negative impact.
Netflix is now facing serious competition from discovery+, Disney+, Peacock, Apple TV+, Hulu, Paramount+ and other on-demand streaming services that have packages in the $5-$7 range. The lowest tier that Netflix has is $9.99 per month. Martin believes that if Netflix doesn’t follow suit, “millions of consumers will stop paying twice as much in favor of the cheaper option.”
After the recent Netflix quarterly earnings call in January, Needham’s Martin wrote in her report, “Since NFLX’s balance sheet cannot withstand lower revenue, we recommend a 5-6 minute/hour ad load to supplement a $5-$7/month consumer fee as a second pricing tier option for consumers. Nearly all of its streaming competitors have now introduced this 2-tier pricing strategy. We believe this pricing would generate higher revenue for ‘ad-light’ subs compared with NFLX’s current no-ads tier. Without a lower cost tier, we believe churn will rise in NFLX’s highest ARPU markets owing to the ‘digital attention recession’ as the economy continues to reopen over the next 12 months.”
However, not having ads is Netflix’s advantage. As a premium product, the company isn’t beholden to big advertisers, which allows them to make riskier, edgier content. Other streamers have to keep things at varying levels of “brand safe.”
A lower-priced option could benefit them, however, since every time it raises its prices, Netflix’s Total Addressable/Available Market (TAM) increases and the streaming service becomes more “out of reach to additional consumers.”
If Netflix decides to do neither, Martin is adamant that it undermines its ability to ever win the streaming wars. Since the company doesn’t take advertising dollars, they are losing the opportunity to accelerate revenue growth. The streamer is “forgoing advertising revenue of $13B/year” in 2022E Revenue.
Although Martin has urged Netflix for years about an ad-supported tier for years, the company has been sticking with its strategy to grow with more content spending and increasing tier prices. And with more than four times the streaming revenue of the next biggest player (HBO Max), they seem to be doing okay.
Netflix
Netflix is a subscription video streaming service that includes on-demand access to 3,000+ movies, 2,000+ TV Shows, and Netflix Originals like Stranger Things, Squid Game, The Crown, Tiger King, and Bridgerton. They are constantly adding new shows and movies. Some of their Academy Award-winning exclusives include Roma, Marriage Story, Mank, and Ma Rainey’s Black Bottom.