After Netflix provided an update on its new advertising business as part of its first-quarter earnings report last week, New Street Research analyst Dan Salmon reduced his estimates for how much revenue advertising will generate for the streaming service.
Netflix said it was already making more revenue from subscribers to the low-priced, ad-supported basic plan with advertising that it does from its standard, ad-free plan.
But Salmon cut his ad-revenue forecast to $441 million in fiscal year 2023 from $561 million and to $1.38 billion in 2024 from $1.71 billion.
If Netflix’s $6.99 per month basic plan with ads is generating more money than its $15.49 a month Standard plan in the U.S., Salmon calculated, that means the company is generating at least $8.50 per member in ad revenue.
On a region-by-region basis, Salmon estimates that average ad revenue per member in the U.S. and Canada will be $8.82 per month, $6.17 in Europe and the Middle East, $2.65 for Latin America and $4.94 for the Asia-Pacific region.
While those numbers look OK, Salmon raised his estimate of what price Netflix can charge on a cost-per-thousand viewers (CPM) basis, while lowering his estimate for hours per day spent viewing Netflix. Salmon left his estimate for ad-tier subscribers unchanged at 2.1 million in the U.S. and Canada for 2023 and 6.5 million in 2024.
Netflix said it was pleased with the trajectory of its advertising business.
With revenue per member above non-ad-supported subscriber levels and few members trading down to the lower-priced tier, Netflix said it was upgrading the features of the ad-supported product.
Ad-supported subscribers will be able to have two concurrent streams and watch in 1080p high-definition resolution instead of 720p.
“We believe these enhancements will make our offering even more attractive to a broader set of consumers and further strengthen engagement for existing and new subscribers to the ads plan,” Netflix said in its shareholder letter.
At the same time as he lowered his ad outlook for Netflix, Salmon sees a slightly higher paid-member outlook, slightly lower operating and adjusted EBITDA margins and higher free cash flow, so he’s raising New Street’s target price for Netflix stock to $346 a share from $333 a share.
