Netflix Stock Wobbles As Wall Street Debates Streaming Giant’s Embrace Of Advertising

Netflix stock dipped 1% to close the week at $230 a share as debate continued on Wall Street about the financial impact of the company’s embrace of advertising.

Basic with Ads, the new subscription tier with four to five minutes of ads per hour of programming, will debut in early November in the U.S. and 11 other countries, the company announced Thursday. It will be priced at $6.99 Stateside.

Two senior executives, COO Greg Peters and global ad chief Jeremi Gorman, presided over a 40-minute demonstration for the press, an event that was later posted to Netflix’s public newsroom, prompting a wave of reactions from Wall Street analysts. Peters has said Netflix, which will report third-quarter results on Tuesday, expects a “neutral to positive” effect from the cheaper tier, with some current subscribers trading down to the lower plan but significant ad dollars coming in and perhaps some new subscribers joining the party given the price point.

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Michael Nathanson of MoffettNathanson issued a follow-up note to his recent report on Netflix’s ad plan, in order to review how accurately the firm had predicted yesterday’s news. While there were many accurate forecasts, Nathanson conceded he had expected the U.S. price to be $7.99, in line with Disney’s soon-to-launch ad tier. He had also envisioned about 80% of the titles on the ad-free tiers to be eligible for advertising under current license agreements, but Netflix put that number at 90% to 95%. Overall, he wrote in a note, “we see this pivot as an incremental positive to Netflix’s financial operations. However, we find ourselves below Street estimates for the first time in a while as other forecasters may be overly optimistic on the impact of this pivot.” Nathanason has a “neutral” rating on Netflix shares.

Guggenheim’s Michael Morris, who has a “buy” rating on the stock and a 12-month price target of $265, said the growth potential for Basic with Ads is outside the U.S. “Nine of the 12 launch markets have membership penetration of broadband homes at levels below the 54% U.S. rate,” Morris wrote in a note to clients. “In combination with the continued development and release of local-market content, we believe the lower-priced ad-supported tier offers an outsized potential for membership growth in these countries.” Tim Nollen of Macquarie agreed with that sentiment, saying he doesn’t expect any new subscriber additions in North America, but definitely in emerging markets. Nollen, who is neutral on the stock, said Netflix “has to get the balance right” between its effort to stimilate growth with cheaper plans and a simultaneous campaign to crack down on password sharing. On the latter front, Nollen jabbed, “it’s unclear if free riders will want to pay at any price.”

Wedbush’s Michael Pachter, who has reversed his long-held skepticism about Netflix shares to become a bull (at least at its current price level), wrote that he feels “confident that Netflix is prudently positioning itself as an immensely and increasingly profitable company.” He reiterated an “outperform” (buy) rating on the stock, maintaining a 12-month price target of $280.

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