Will Netflix Start Using Ads?

While most companies struggled to adapt during the pandemic, Netflix (NFLX) and similar services seemed positioned for success. 

A look at Netflix’s recent stock history shows how the pandemic helped the company thrive. The company’s stock price had been bouncing around between $250 and $350 for more than a year. In 2020, though, shares climbed above $500. The price peaked at $690 on October 22, 2021. Since then, Netflix has faced more scrutiny and its share price has fallen.

The price drifted to about $350. Then, on April 20, 2022, it took a sharp dive and landed below $230. Now, Netflix has a lower price than it did before the pandemic. What happened to upset investors so much that they dumped shares in a company that had been doing so well just months before?

Netflix Earnings Disaster

Netflix did an excellent job predicting its earnings throughout 2021. It actually beat its revenue projections in Q2 and Q4. Last year’s success made it even more surprising that Netflix missed its 2022 Q1 projection by 0.95%.

The company still increased its revenue from Q1 2021. But Netflix needed to meet or beat its projections to prove it could support a stock price over $500. That didn’t happen, and the market responded.

Netflix reported a loss of about 200,000 subscribers during Q1. Executives were upfront about their expectations, saying that they believe the company will lose another 2 million by the end of Q2.

Previously, Netflix said it had expected to add 2.5 million subscribers. That’s not a surprise given the company had grown quarter over quarter for years, but a tectonic shift appears to have taken place.

So what does that mean for the Netflix business model? What other avenues will management use to monetize?

Will Netflix Start Using Ads?

Netflix has resisted relying on ads for revenue. Until recently, that approach has worked well. Some consumers don’t want ads interrupting their viewing experiences, so they will gladly spend a few more dollars per month to avoid them.

Unfortunately, Netflix raised its prices at the beginning of 2022. The higher price may seem extravagant and unaffordable to households that know they have a growing number of low-priced and free entertainment options.

Co-CEO Reed Hastings says that Netflix will explore advertising as a way to offer customers lower prices on certain membership plans. Historically, Hastings has preferred straightforward membership plans without the complexity of advertisements.

Now, he believes consumers have expressed their desire for a low-priced tier that uses ad revenue to offset membership fees. The company plans to present this option within a year or two.

What Does This Mean for Netflix Stock?

It’s hard to know how Netflix stock will continue responding to this latest round of concerns. It seems possible that the rapid sell off that happened on April 20 was the result of shock and fear. Netflix investors aren’t used to hearing bad news, so some of them might have sold shares without thinking about the long-term possibilities.

Perhaps Netflix deserves to stay somewhere in the $200 to $250 range for a while. The company has more competitors than ever, so has lost some market dominance over the last few years.

Alternatively, Netflix executives might have needed to see damaging numbers before deciding to make positive changes that will help the company adapt to the streaming industry.

Realistically, all interested investors need to take a long-term view of how Netflix will perform. The stock is unlikely to improve much overnight. It might regain some of its value during Q2, especially if it loses fewer than the 2 million subscribers executives predict.

But, it could take a year or two before Netflix releases a membership tier that uses ads to subsidize a portion of its subscription fee. It seems reasonable to expect that the stock will rebound at least slightly once Netflix reveals a concrete plan. Until then, don’t expect to see much growth through Q2.

If Netflix Loses, Who Wins?

To answer that question, we need to know where those 200,000 subscribers went. Did they decide that their household budgets simply don’t have room for paid memberships? If that’s the case, then ad-supported platforms will likely benefit. That would include YouTube, the Roku Channel, Tubi, and IMDd TV.

If the lost subscribers decided that they’re willing to spend money on a service that meets their needs better, then companies that might benefit include Disney+, HBO Max, and Apple TV.

It’s possible that Netflix’s loss doesn’t mean that anyone “wins.” Some of those subscribers probably had multiple memberships. If they’re cutting back on spending, they might have chosen to just make do with one less service. If that’s the case, Netflix could pick up some of those lost subscribers when the inflation slows and people feel more confident about their personal budgets.

Then again, some of the subscribers who left Netflix will find alternatives. If they get accustomed to those alternatives, they might never return. Obviously, Netflix hopes to lure them back with low-priced plans that show advertisements. 

What Does the Future Hold for Netflix?

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.