Netflix: Stock of the Week

Andrew Willis:

Did you know that for every hour of U.S. cable television you watch, you’re being subjected to around 16 minutes of commercials? Now add up all the hours watched per month ...

What if I told you that you could have all that time back in your life for only a few dollars a month? This situation is kind of the opposite of what Netflix NFLX is going to be doing with their subscription plans, although in exchange for much less time.

Three to four minutes of advertisements, per hour, in exchange for a few bucks a month is a trade that senior equity analyst Neil Macker expects many existing Basic plan users will be making [as of] Nov. 3. But is the offer really attractive enough to move the needle at Netflix?

After recent earnings, we’re raising our fair value estimate by $10 to $290 a share to account for stronger subscriber growth from the ad-supported tier. But there will be competition. Netflix’s new ad-supported tier is around $7, but Hulu’s version is even cheaper if bought annually, and it can be packaged with Disney DIS for only $10 a month.

This new tier is also much more expensive than YouTube’s free service. However, the family tier of YouTube Premium is more expensive than all tiers of Netflix, which might tell us something about the value of the data and ad space at Google for advertisers. Let’s see if Netflix, with even more global streaming traffic, can sell more than a few dollars in commercials.

For Morningstar, I’m Andrew Willis.

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