Netflix: New Ad Model Can’t Save The Company

Summary:

  • With the introduction of Netflix’s Basic with Ads plan, we estimated its total subscriber growth to increase by an average of 9.9% through 2026.
  • We see an increasing forecasted revenue growth rate for its ad-tier from 7.4% in 2022 to 18.6% in 2026 and a forward average of 12% over the next 5 years.
  • Though, we expect its flattish margin outlook due to the potential costs incurred for its Microsoft partnership as its adtech provider.
  • However, we still find Netflix’s business model shift unable to keep it ahead of the onslaught of new competitors.

Entertainment Industry Workers Vote To Strike, Threatening Hollywood Productions

Mario Tama

While Netflix, Inc. (NASDAQ:NFLX) is the market leader in the video streaming market with a share of 21%, its market share had eroded in the past year with intense competition. However, the company announced the launch of its new

Netflix Subscribers (‘mln’)

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Average

Netflix Subscribers

25.71

35.63

47.99

62.71

79.9

99.04

124.35

151.56

192.95

209

Growth %

19.6%

38.6%

34.7%

30.7%

27.4%

24.0%

25.6%

21.9%

27.3%

8.3%

25.8%

Streaming Market Penetration Rate

2021

2022F

2023F

2024F

2025F

2026F

AVOD

20%

27%

36.5%

49.2%

66.4%

89.7%

Growth %

35.00%

35.00%

35.00%

35.00%

35.00%

SVOD

81%

83%

85.0%

87.1%

89.3%

91.5%

Growth %

2.5%

2.47%

2.47%

2.47%

2.47%

Population Growth

0.90%

0.90%

0.90%

0.90%

0.90%

Market AVOD Growth %

36.2%

36.2%

36.2%

36.2%

Market SVOD Growth %

3.4%

3.4%

3.4%

3.4%

Netflix Subscribers

2021

2022F

2023F

2024F

2025F

2026F

AVOD

21.3

50.3

89.8

143.7

217.0

Growth %

136.2%

78.5%

59.9%

51.0%

SVOD

199.4

184.1

168.3

152.0

135.1

Growth %

-7.7%

-8.6%

-9.7%

-11.1%

Total Subscribers

221.84

220.7

234.4

258.2

295.7

352.2

Growth %

-0.5%

6.2%

10.1%

14.5%

19.1%

video streaming share

Justwatch, Khaveen Investments

netflix prices

Netflix

Country

Basic with Ads Plan Price per month

Exchange Rate

Price in $

Australia

6.99

0.64

4.47

Brazil

18.9

0.19

3.59

Canada

5.99

0.74

4.43

France

5.99

1

5.99

Germany

4.99

1

4.99

Italy

5.49

1

5.49

Japan

790

0.0068

5.37

Mexico

99

0.051

5.05

South Korea

5500

0.00073

4.02

Spain

5.49

1

5.49

United Kingdom

4.99

1.14

5.69

United States

6.99

6.99

Average

5.13

Netflix Revenue from Subscription ($ mln)

2022F

2023F

2024F

2025F

2026F

AVOD

1,394

3,502

6,648

11,304

18,153

Growth %

151.1%

89.8%

70.0%

60.6%

SVOD

29,684

29,144

28,330

27,201

25,710

Growth %

-1.8%

-2.8%

-4.0%

-5.5%

Total Subscription Revenue

31,079

32,646

34,978

38,505

43,864

Growth %

5.0%

7.1%

10.1%

13.9%

Ad Revenue Per User

Revenue ($ mln)

Users (‘mln’)

Ad Revenue Per Users ($)

Hulu

2,100

27.8

75.5

Paramount+ (PARA)

2,145

32.8

65.40

Peacock

500

15.5

32.26

The Roku Channel (ROKU)

2,285

60.1

38.02

Tubi

380

51

7.45

Pluto TV

786.7

64

12.29

Average

1,366

41.9

38.49

Netflix Revenue ($ mln)

2022F

2023F

2024F

2025F

2026F

Total Subscription Revenue

31,079

32,646

34,978

38,505

43,864

Growth %

5.0%

7.1%

10.1%

13.9%

Ad Revenue

820

1,937

3,458

5,531

8,354

Growth %

136.2%

78.5%

59.9%

51.0%

Total Revenue

31,898

34,583

38,436

44,036

52,217

Growth %

7.4%

8.4%

11.1%

14.6%

18.6%

Netflix Microsoft Partnership Costs

2022F

2023F

2024F

2025F

2026F

Netflix AVOD Subscribers (‘mln’)

21.3

50.3

89.8

143.7

217.0

Average Ad Revenue Per Subscriber ($)

38.5

38.5

38.5

38.5

38.5

Total AVOD AD Revenue ($ mln)

820

1,937

3,458

5,531

8,354

Cost to Netflix from Microsoft Partnership (25%) ($ mln)

205

484

865

1,383

2,088

Profitability

2022F

2023F

2024F

2025F

2026F

Total Revenue

31,898

34,583

38,436

44,036

52,217

COGS as % of revenue

59.40%

58.85%

57.43%

56.04%

54.69%

COGS

18,949

20,854

22,073

24,679

28,558

Microsoft Partnership Cost

205

484

865

1,383

2,088

Adjusted COGS

19,154

21,338

22,938

26,061

30,647

Adjusted COGS as % of revenue

60.0%

61.7%

59.7%

59.2%

58.7%

Netflix margins

Company Data, Khaveen Investments

Cannibalized Revenue Base Case

2022F

2023F

2024F

2025F

2026F

Cannibalized SVOD Subscribers (‘mln’)

21.3

21.3

21.3

21.3

21.3

Cumulative Cannibalized SVOD Subscribers (‘mln’)

21.3

42.6

63.9

85.2

106.5

SVOD Revenue Per User ($)

12.41

13.19

14.03

14.91

15.85

Cannibalized SVOD Revenue ($ mln)

3,172

6,744

10,756

15,247

20,264

AVOD Subscribers (‘mln’)

21.30

42.60

63.91

85.21

106.51

AVOD Subscription Revenue Per User ($)

5.46

5.80

6.17

6.56

6.97

AVOD Subscription Revenue ($ mln)

1,394

2,965

4,729

6,704

8,909

AVOD Ad Revenue Per User ($)

38.49

38.49

38.49

38.49

38.49

AVOD Ad Revenue ($ mln)

820

1,640

2,460

3,280

4,100

Total AVOD Revenue ($ mln)

2,214

4,605

7,189

9,984

13,009

Net Cannibalized Revenue ($ mln)

-957

-2,139

-3,567

-5,264

-7,254

Cumulative Cannibalized AVOD Subscribers (‘mln’)

21.3

42.6

63.9

85.2

106.5

Total AVOD Subscribers (‘mln’)

21.3

50.3

89.8

143.7

217.0

Organic AVOD Subscribers (‘mln’)

0.0

7.7

25.9

58.5

110.5

AVOD Subscription Revenue Per User ($)

5.46

5.80

6.17

6.56

6.97

AVOD Subscription Revenue ($ mln)

0

537

1,919

4,601

9,244

AVOD Ad Revenue Per User ($)

38.5

38.5

38.5

38.5

38.5

AVOD Ad Revenue ($ mln)

0

297

998

2,251

4,254

Total Organic AVOD Revenue ($ mln)

0

834

2,918

6,851

13,498

Net Revenue Gain

-957

-1,305

-649

1,588

6,243

Scenario Analysis

2022F

2023F

2024F

2025F

2026F

Average

Base Case

-957

-1,305

-649

1,588

6,243

984

Minor Bear Case (Pricing 8% Less)

-1,134

-1,740

-1,458

241

4,123

6

Major Bear Case (Pricing 16% Less)

-1,312

-2,175

-2,266

-1,106

2,002

-971

Netflix valuation

Company Data, Khaveen Investments


Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No information in this publication is intended as investment, tax, accounting, or legal advice, or as an offer/solicitation to sell or buy. Material provided in this publication is for educational purposes only and was prepared from sources and data believed to be reliable, but we do not guarantee its accuracy or completeness.


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