A Netflix (NFLX) with ads is "a big deal," Stifel analyst Mark Kelley said as he upgraded this stock to Buy this morning. The analyst believes connected TV will gain momentum with Netflix and Disney+ (DIS) both having recently announced intentions to offer ad-based tiers. Based on his assumptions of what he views as reasonable assumptions for ad spend on Netflix, Kelley estimates Trade Desk (TTD) should see an incremental $300M in 2023 revenue with a bull case of an incremental $950M.
BUYING INTO CTV INFLECTION POINT: Stifel analyst Mark Kelley upgraded Trade Desk to Buy from Hold with a price target of $80, up from $50. A Netflix with ads is "a big deal" and it changes Stifel's view on the state of connected TV advertising in the near-to-medium term, Kelley told investors in a research note. The analyst estimates Trade Desk should see an incremental $300M in 2023 revenue, with a bull case of an incremental $950M. Further, Kelley believes connected TV ads will gain even more momentum with Netflix and Disney+ both having recently announced intentions to offer ad-based tiers, which he sees as "a major change" that will likely accelerate the already occurring shift of linear ad dollars to streaming video and ad-supported video on demand platforms.
Kelley sees a base case of close to $12B in ad spend on Netflix, with upside to $25B. After years of saying advertising doesn’t make sense for Netflix, the company changed its tune when it reported results last month. The company has suggested a lower-priced offering with advertising would be available “over the next year or two” while recent press has offered a fairly near-term timeline, the analyst noted. While there are many questions to be answered on how Netflix will proceed with this new offering, he views this sea change from Netflix as a tipping point and major catalyst for linear budgets to truly make the transition to CTV.
POSITIONED TO EXCEED Q2 GUIDANCE: Meanwhile, Wedbush analyst Michael Pachter upgraded Netflix to Outperform from Neutral with a $280 price target as he finds shares to be a compelling investment. The analyst thinks Netflix is positioned to exceed its guidance for the second quarter, particularly because of the staggered release date for Ozark. While it is possible that the company will once again issue downbeat guidance for the third quarter, Pachter believes the staggered release date for Stranger Things will reduce churn, and once again, thinks that Netflix is positioned to grow. The analyst does not expect wholesale changes to occur rapidly, and expects Netflix will only gradually raise prices and roll out its ad-supported option. However, he believes that the sooner the company shows its commitment to reducing churn by releasing new content over several weeks, investors will see an uptick in subscribers and their confidence in the Netflix business model will be restored.
Netflix has problems, but is beginning to address them, the analyst noted. Netflix intends to “crack down” on password sharing, believing that 30 million households in UCAN and 100 million globally are using shared passwords. Pachter believes Netflix is unlikely to win more than a few million new customers by changing its practice. However, Netflix’s plan to adopt an advertising supported subscription has great potential to drive significant revenue, in his view. That said, it could also cannibalize existing customers. On balance, the analyst thinks ad-supported subscriptions is a good idea, particularly as a disincentive to churn. Another meaningful change Netflix can make to limit churn is spreading out its most popular content, he added.
PRICE ACTION: In Monday morning trading, shares of Trade Desk have gained over 2% to $53.
