Analyst Maintains Netflix 'Sell' Rating, Saying Ads Are Risk to Brand, ARPU

Pivotal Research Group repeated a “sell” rating on Netflix's stock despite some analyst optimism (see 2210050031) over the streaming company’s upcoming ad-supported tier and anticipated resulting average revenue per user (ARPU) growth. Pivotal's view remains unchanged as "we see the move to offer an ad supported tier by the global streaming incumbent player as defensive not offensive” and “fraught” with risks to ARPU, technology and product perception, analyst Jeffrey Wlodarczak wrote investors Tuesday. An ad-supported tier won’t likely allow Netflix to return to annual subscriber growth, with Netflix nearly fully penetrated at about 80% of the U.S., counting piracy, Wlodarczak said. Pivotal sees a “significant ARPU risk of existing households churning down” to a “less attractive ad supported service” while making Netflix “dramatically more reliant on variable advertising spend." That could put ARPU at risk if advertising is lower than expected due to an “increasingly likely ’23 recession.” That Netflix’s peers are also moving to ad-supported offerings creates the potential for “too much inventory,” he added. An ad-supported version “taints the [Netflix] brand,” Wlodarczak said, saying the technology behind successful advertising delivery is difficult; Netflix’s original programming isn’t optimized for ad breaks, he said. An “underappreciated risk” is that Netflix management believes it can moderate content cost growth “when virtually all of their peers are accelerating investment in content particularly on exclusive sports rights which could ultimately hit NFLX subscriber growth or push the company to reaccelerate content investment spend,” Wlodarczak said. Netflix reports Q3 earnings Oct. 18.