By Sam Boughedda
An analyst at Morgan Stanley told investors in a note on Tuesday that Netflix's (NASDAQ:NFLX) launch of an ad-tiered subscription is beneficial to long-term revenue growth.
In a deep dive on Netflix, the analyst, who has an Equal-Weight rating and $230 price target on the stock, explained that the primary benefits of launching an ad-supported tier are lowering the consumer burden on average revenue per user growth (ARPU) and total addressable market expansion.
"We see the move into an ad supported tier as strategically sound. It should allow Netflix to grow ARPU, which will be the primary driver of revenue growth over time, with less dependence on raising consumer prices by delivering a highly compelling audience and ad products to advertisers. It also provides an on-ramp to live sports, a substantial element of the TV TAM that Netflix does not address today," the analyst wrote.
The analyst suggests that high levels of engagement and the potential for premium CPMs suggest a $7 to $9/monthly US price point creates an opportunity for incremental net adds while likely limiting the risk of ARPU dilution.
Ultimately, he believes Netflix's advertising success will come from taking market share rather than new ad spending.
"Netflix's advertising gains will primarily be lost revenue for other ad platforms. When we further consider the ramping ad impression supply across streaming competitors (Disney Plus, Paramount Plus, HBO Max, Freevee, etc.) in the context of fairly fixed demand, we can imagine a scenario where these premium CPMs normalize at lower levels over time."
Netflix shares are down over 2% Tuesday.