Netflix Is Competing for “Just” $8.7B in Ad Revenue, Analyst Estimates, But Boosts Stock Price Target by $100

Georg Szalai
·3 min read

Just how big is Netflix’s advertising opportunity now that its ad-supported service tier has hit its first milestone of around 5 million users?

Wells Fargo analyst Steven Cahall assessed this question in a deep dive published on Wednesday, entitled “The Long & Winding Road Ahead for Advertising.” He started off his report with some basic math. “It would seem logical that the $70 billion+ (U.S.) TV ad marketplace will be easy pickings for Netflix’s ad-supported tier,” he wrote. “In fact, we think just $8.7 billion is currently up for grabs as that’s the ad value that’s non-sports linear that also isn’t locked up by media companies in their upfront deals. Share gains will take time as Comcast/Disney/Fox/Paramount/Warner Bros. Discovery each deliver more than 600 billion TV impressions annually versus 15 billion estimated for Netflix at 5 million U.S. ad-supported subs.”

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Cahall’s conclusion about the ad status quo: “Brands are hooked on linear.” The Wells Fargo analyst provided further data to support his argument. “Our analysis of more than 100 linear networks indicates around 160 billion annual hours of ad-supported time from major media companies generating 2.9 billion impressions at an effective CPM (or cost-per-thousand) of just $12,” he highlighted. “We think advertisers are hooked on the volume and pricing, though paying far higher for sports and primetime for a mix of quality and quantity. We think major AVOD (including Netflix) is currently 36 percent of ad-supported TV hours, but just 13 percent of impressions (lower ad load) at an effective roughly $16 CPM.”

With Netflix management having signaled average revenue per user (ARPU) of around $8.50 per month for its domestic ad tier right now, Cahall noted that “we think the highest effective AVOD CPM is currently $21 (for) Hulu.” His forecast: “At scale, Netflix will see similar CPMs, meaning $10 per month ad ARPU.”

What’s next for Netflix’s ad business? The Wells Fargo analyst mentioned various options and milestones ahead. “We see 20 million-plus U.S. ad subs as a key goal, as that would put Netflix’s annual impressions closer to the likes of Hulu and AMC Networks (though still less than a sixth of larger media companies),” he mentioned. “Paid sharing is a key catalyst, and we think premium ad tiers will come.”

The expert can also imagine the company considering forays into ad-supported live content, such as via more stand-up comedy, reality TV and even a possible deal for WWE’s Smackdown.

Cahall’s conclusion: “The U.S. TV ad market is unique, arcane and still pretty analog. This deep dive is intended to help investors understand Netflix’s opportunity, but we’re cautionary on the time/obstacles.” He did call out “improving customer lifetime value” though, highlighting that Netflix was overall “driving value per sub higher.”

As a result, Cahall stuck to his “overweight” rating on Netflix, while raising his stock price target by $100 to $500.

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