What if Netflix with Ads gets as large as YouTube?
Revisiting Netflix's valuation in 2023. Spitballing a bit here.
Netflix now has a new revenue stream - Advertising.
I wrote about Netflix in 2021 in an article that hasn’t aged well. My growth estimates for subscribers was too high and the business appears to have saturated its key markets. Subscriber growth was 4% in Q1 of 2023, much much lower than the 20% I had penciled out.
I still hold my small sub 2% position in Netflix and haven’t built it out fully. One reason was a rich valuation that required aggressive growth targets to be met. To be frank, I had accepted the Netflix would be a loss making long term position within the portfolio. I simply held to keep tabs on the company.
A thesis change has no occurred and I think it is time for a fresh speculative valuation of Netflix.
Netflix’s Advertising Business
Very early days, but according to the Q1, 2023 finances, Netflix makes more money per subscriber on the Ad tier than it does on the paid tiers.
The results are so promising that Netflix is doubling down and improving the overall quality of the ad-supported tier. Ad supported tiers can now have 2 streams in 1080p. Assuming this works really well, it isn’t hard to imagine Netflix improving the ad tier over time and making it available to a wider audience.
Eventually, it is possible with enough ad buyers, the ad-supported tier could become free. If this happens, Netflix stands a good chance of building an ad business that overshadows the paid subscription business.
There are 2 scenarios i’d like to visit in this writeup :
Moonshot Case : Netflix Advertising gets as large as Youtube’s
Base Case : Netflix Advertising gets as large as Disney’s
In Youtube’s case, revenues are about $24b a year. Active Users : 2.1 billion
In Disney’s, advertising revenue is about $9b a year. 40% of this came from Disney+, ESPN+ and Hulu which has a total subscriber count of about 230 million.
Netflix currently has a 232 million subscribers (paid).
Valuation of the Ad Business - Wait and See.
Unless Netflix gets a billion people onto its ad-supported tier, we’re likely looking at a Disney sized advertising business in the 3-4 billion range (40% of $9b). A business of that size is not going to move the needle for Netflix’s valuation. It’s nice, but likely represents a $30-$40b market cap gain on today’s valuation assuming a 10x revenue multiple. Roughly 20-30% gain from today’s share price.
What Netflix needs to do is to get to that 1 billion plus user level. Amazon, Facebook, Google have massive advertising revenues because north of 2 billion people use each service.
Can Netflix get to that level? Possibly. But it’s likely going to require them to make the ad-supported tier free. They will also need to build out an ad engine as sophisticated as Google’s and Facebook’s. I don’t think relying on a collaboration with Microsoft is the right approach if this ad business is to scale to billions of users.
Until they do that, I will likely not grow my Netflix position beyond that small tracer position of sub 2%.
Note : I am not a financial advisor and this is my personal portfolio. Do not blindly follow and do your due diligence. You can lose money by investing in the stock market. All my writing is opinion and NOT advice.
I have been wrong on some firms. Peloton for example didn’t grow as intended and management tore through the balance sheet with little discipline. This is par for the course in investing. You win some, you lose some. Had you blindly followed my work on Peloton, you’d have lost over 80% of your capital. Proceed with caution.