Netflix stock will 'suffer' if ad rollout struggles continue, analyst warns

Netflix's (NFLX) new ad-supported offering appears to be undergoing some growing pains.

According to a new study by subscription analytics firm Antenna, cited by The Wall Street Journal, the streaming giant's $6.99 ad-supported offering was the least popular tier of its service during the month November.

The ad tier, which officially debuted in U.S. markets on November 3, accounted for just 9% of Netflix sign-ups during the month. About 57% of those ad-supported subscribers re-joined the service or signed up for the first time. 43% traded down to the cheaper plan, Antenna data revealed.

"If this doesn't work, I think the stock will suffer because part of the recovery story for Netflix stock is getting this advertising tier to work," Tim Nollen, analyst at Macquarie Group, told Yahoo Finance Live on Monday.

To compare, Warner Bros. Discovery's (WBD) HBO Max saw stronger results after its $9.99 ad-supported tier debuted in June 2021. At that time, the plan accounted for 15% of new signups in the U.S. during its first month, while just 14% of the new users downgraded from the more expensive, ad-free tier.

In a statement, a Netflix spokesperson told Yahoo Finance, "There are a number of inaccuracies in this reporting. It’s still very early days for our ad supported tier and we’re pleased with its launch and engagement, as well as the eagerness of advertisers to partner with Netflix."

Netflix shares were little-changed on Tuesday afternoon.

Antenna's study comes after Netflix's stock lost nearly 9% last Thursday, its biggest intraday drop since April, after a new report from Digiday said the streaming giant fell short on viewership guarantees it made to advertisers for the ad tier.

According to Digiday, which cited five agency executives, Netflix is now allowing ad buyers to take their money back after missing viewership targets. The company reportedly only delivered around 80% of the expected audience.

"Netflix is in a bit of a quandary here in getting the service off the ground," Macquarie's Nollen admitted. "They are diluting themselves by trying to convert their U.S. subscriber base to an ad-supported plan. It's $3 less per month. That's $3 less per subscriber right there. They have to make up for that with ad sales."

Nollen argued it will take time for the company's ad tier to fully mature, surmising the company won't see incremental revenue from the new offering until at least 2024 or 2025.

"It's not a completely transformational game-changer for Netflix, but it should be revenue-enhancing," he added.

Shares of Netflix, down about 50% since the start of the year, have climbed roughly 65% over the past six months as other industry watchers see content improvements decreasing churn in 2023.

Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at [email protected]

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