As Netflix Gears Up For A New Ad-Supported Tier: Here's What Morgan Stanley Analysts Have To Say

Analysts at Morgan Stanley maintain an Equal Weight on streaming giant Netflix Inc. NFLX, as the potential earnings lift from introducing an ad-supported tier and paid sharing remain unknown.

The entertainment company behind "Stranger Things" and "Squid Game" faces risks of market saturation, rising competition and a weakening global consumer.

The Analysts: Morgan Stanley analysts Benjamin Swinburne, Thomas Yeh, and Cameron Mansson-Perrone issued a note to investors on Thursday, reiterating that Netflix is the obvious leader in the streaming wars, but is still a growing company in a highly competitive market facing a global consumer under increasing economic stress.

Want to see more analyst ratings? Be sure to check out our ratings page!

The Thesis: The new lower-priced ad-supported tier is the primary opportunity for TAM (total addressable market) and APRU (average revenue per unit) accretion in developed markets.

Morgan Stanley also raised its UCAN (United States, and Canada Subscribers) net adds outlook from modestly shrinking to modestly growing over time but remain at or modestly below consensus.

“While we see the ad-supported tier as a TAM expander and paid sharing as ARPU enhancing, it is not clear to us these initiatives offer meaningful upside to expectations,” the analysts wrote. “At the same time, NFLX shares have re-rated over the past few months and current valuation — while not stretched, in our view — is not overly compelling, leaving us EW rated.”

See Also: Netflix Weighs Charging A Whopping Sum For Ads, Buyers Say

Morgan Stanley also raised its '23-'25 net additions to incorporate modest TAM expansion in UCAN from a lower priced ad-tier but lower near-term EPS due to FX, leaving its PT (price target) and bull/bear views unchanged.

Netflix's paid sharing and ad-tier plans represent interesting monetization potential but do not inherently improve the product. The main long-term driver of value creation and growth will be increasing the return on its content investment.

Currently, content investment growth is more moderate. Morgan Stanley sees potential to increase return on existing spend, but anticipates that investment levels will eventually need to increase in order to meet revenue forecasts.

See Also: Why 3 Pepsi Analysts Are Raising Price Targets After Q3 Earnings

Price Target: Netflix stock was trading at $221.84 per share on Thursday, Oct. 13, up 0.44%, at the time of writing.