Netflix (NASDAQ: NFLX) has been struggling over the past year. Since the company reported a subscriber loss for the first time in more than 10 years, growth investors have been dumping the streaming stock. Year to date, its shares are now down 63% compared to the S&P 500's decline of 17%.
But Netflix has a strategy to drive more growth and win investors back, and that's by introducing ad-based plans. It's not a move that everyone is a fan of; however, there are reasons investors should be bullish on this pivot.
What the ad strategy might look like
By offering ad-based plans, Netflix can offer consumers lower price points, potentially as low as $7 a month. That's less expensive than its basic plan, which today costs $9.99. With inflation still posing a big problem for the economy, consumers could opt for ads on their streaming services if it means trimming costs. And the new plans could be coming as early as Nov. 1, in order to get the jump on rival Walt Disney, which is unveiling its ad-based plans in December.
A recent article from The Wall Street Journal highlighted some of the features of Netflix's new ad strategy, and there are some promising features that could make it a big success. Netflix knows its service is popular and out of the gate, according to an unnamed ad buyer, it is looking for a high price for its ads -- $65 CPM (cost per 1,000 impressions). Ad rates can vary wildly depending on the medium, as low as $10 for regular TV ads. At $65, Netflix is definitely on the high end of the range, at least initially. But given the popularity of its service, it likely doesn't need to be giving ads away at a discount. By getting a lot of bang for its buck, the tech company may also not need to resort to having to flood its content with ads in order to boost sales. Netflix reportedly also isn't looking to be too dependent on a single brand, looking to limit the annual spending to $20 million.
With ads now part of the viewing experience, viewers may be concerned that the service may come to resemble traditional cable. However, Netflix is also reportedly looking to ensure that there are only four minutes of ads per hour -- far less than cable TV, where there can be five times as many ads during the same period.
The payoff may not be significant, at least for now
Netflix hasn't finalized its strategy, but the early signs are encouraging that it isn't flooding its content with ads. For consumers, that can make ad-based plans more of an option.
And as to how much it could mean for the business in terms of revenue, at the low end, Netflix may generate at least an extra $1.2 billion in annual revenue by 2025, according to one estimate. That would be less than 4% of the $31 billion in revenue that the company reported over the trailing 12 months.
That's not a huge amount; however, with Netflix also cracking down on sharing accounts, it could also lead to higher subscriber numbers. And if the ad business goes well, it wouldn't be surprising to see the company offer more ad-based plans.
Is Netflix stock a buy?
At a price-to-earnings ratio of just 20, Netflix is cheap compared to the average tech stock, which averages a multiple of more than 25. Plus, with Netflix now focusing more on cutting costs than it did in the past, its profitability could improve, making its valuation look even more attractive than it is today.
Overall, the moves Netflix is making right now should set it up for strong results in the future. Although the stock has been struggling, buying it could be an excellent move for long-term investors.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
