Netflix rises as Morgan Stanley sees benefits from advertising tier
Netflix (NASDAQ:NFLX) shares rose slightly in premarket trading on Thursday as investment firm Morgan Stanley reiterated its equal-weight rating on the streaming giant, but said there would be opportunities thanks to its upcoming advertising-supported tier.
Analyst Benjamin Swinburne, who also has a $230 price target on Netflix (NFLX), noted that the ad-supported tier could help Netflix (NFLX) not only expand its total addressable market, but also grow its average revenue per user in developed markets.
"As a result, we raise our [U.S. and Canada] net adds outlook from modestly shrinking to modestly growing over time but remain at or modestly below consensus," Swinburne wrote.
The firm now believes the region could generate between 9M and 10M new subscribers in 2023, but noted there is a "wide range of outcomes," pointing out the fact that every 10 basis points of monthly churn is the equivalent of 2 to 3M net subscribers.
The analyst also raised his estimates for paid net additions between 2023 and 2025, with expectations now for Netflix (NFLX) to add between 9M and 10M new subscribers per year, up from a prior view of 8M.
Swinburne also said that Netflix (NFLX) could see a "modest lift" to average revenue per user as it institutes its paid-sharing initiatives, with a "minority" of the 100M password shared accounts monetized over the next two to three years.
The analyst noted that if there is just a $3 to $5 per month benefit from paid sharing, average revenue per user could rise between 100 and 900 basis points compared to 2022 levels.
However, any benefit from higher net subscribers is likely to be offset by continued strength in the U.S. dollar, creating foreign exchange headwinds to both revenue and margins, along with near-term earnings per share.
And while Swinburne noted that Netflix (NFLX) is the "clear market leader in streaming," shares have re-rated a bit in the past few months, trading at 23 times estimated 2023 earnings per share and 18 times EBITDA estimates.
"For the first time in years, consensus estimates for Netflix have been moving higher and shares have seen multiple expansion," Swinburne penned.
"We acknowledge a high degree of uncertainty in the impact on growth from both the ad-supported tier and paid sharing, but we do believe some degree of success has been reflected in the stock," Swinburne continued, adding that the risk-reward in shares is now "fairly balanced."