Netflix's Ad-Tier Expansion And Password Crackdown Fuel Revenue Growth: JP Morgan Analyst

JP Morgan analyst Doug Anmuth maintained an Overweight rating on Netflix Inc NFLX with a price target of $750.

Anmuth noted that Netflix is a top pick, backed by mid-teens revenue growth in fiscal years 2024 and 2025, led by healthy organic growth, paid sharing, and price increases. He said ads will kick in more in fiscal years 2025-2026.

Also Read: Netflix Vs. Disney: Internet Traffic Crowns One Streaming Giant, While Both Leave Competitors In The Dust

The price target is based on ~26.5 times 2026 GAAP EPS of $28.19 and ~29.5 times free cash flow of $10.7 billion, implying a premium to mega-cap tech peers trading at ~23 times 2026E GAAP EPS on average, which Anmuth said is justified citing Netflix’s similar top-line growth & faster bottom-line growth.

The analyst flagged continued operating margin expansion while still investing in content, ads, and gaming and multi-year free cash flow ramp on improving profit and cash content discipline, with increasing buybacks.

Netflix’s strong streaming leadership position and potential to become global TV as it expands its 278 million member base across the 500 million+ global CTV HHs ex-Russia & China

Anmuth noted that Netflix’s global scale, intense engagement, and diversified content will make it the default choice for users consuming TV, film, and other long-form content on 13 September 2024.

Netflix is a key beneficiary and driver of the ongoing disruption of linear TV. Netflix’s content performs well globally and drives a virtuous circle of strong subscriber growth, more revenue, and growing profit.

With ~278 million global subscribers, Netflix has a strong leadership position in the rationalizing streaming industry.

Anmuth expects Netflix to benefit from the worldwide proliferation of Internet-connected devices and increasing consumer preference for on-demand video consumption over the Internet.

He added that Netflix’s ad-supported tier and paid sharing initiatives should expand its subscriber base while driving high-margin incremental revenue.

While Netflix’s current focus is sports entertainment, events, and shoulder content, Anmuth expects a more significant push into live sports over time, particularly as Netflix’s negotiating leverage continues to shift.

While Netflix’s Ad Tier scale lags, Anmuth is confident Netflix can increase scale through changes in plans, pricing, bundling, and live event content with broad appeal.

The analyst projects Ad Tier subscribers of 31 million by the end of 2024 and 42 million by the end of 2025, which ties to 66 million and 91 million MAUs, assuming ~2.2 times MAUs per subscriber.

Anmuth’s estimates suggest advertising revenue (ex-subscriptions component) will reach 10%+ of total revenue in 2027.

The analyst noted Netflix also left the door open at second-quarter earnings for an Ad Tier price increase, which is more viable given the planned $2 price hike for the Disney+ Ad Tier to $9.99 per month and Netflix more broadly priced at a ~13%-22% discount to competitors’ offerings.

Anmuth projects average 2025 and 2026 revenue growth of +12%, +18% operating income growth, +22% GAAP EPS growth, and +28% free cash flow growth, which he noted supports Netflix’s premium valuation.

Price Action: NFLX stock is up 1.44% at $696.69 at the last check on Friday.

Also Read:

• Netflix Games Hit 210M Downloads: Which Game Took The No. 1 Spot?

Image via Shutterstock