Netflix’s next ad tier will grow subscribers and narrow the free cash flow gap

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Netflix (NASDAQ: NFLX) surprised investors last month when it reported losing 200,000 subscribers in the first quarter, prompting the company to announce it would introduce an ad-supported option. This new level of subscription is likely to kick-start subscriber growth and narrow the gap between free cash flow and net income, investment firm Citi said.

Analyst Jason Bazinet, who rates buying Netflix (NFLX) stock with a price target of $295 per share, noted that due to the lack of free cash flow, value investors don’t know. how to value the business and with the lack of subscriber growth. , it has no “natural investor base”.

“We believe that an ad-based level – which we expect in 2023 – will allow Netflix to resume its undergrowth and help close the approximately $5 billion gap between FCF and net income,” Bazinet wrote in a note to clients.

Netflix Shares (NFLX) fell nearly 1.5% to $184.84 in premarket trading on Tuesday.

As for the company’s other initiative, which is to further increase the monetization of account sharing, Bazinet is less optimistic, noting that it is “unlikely to improve beyond current levels.”

Citing Google (GOOG) (GOOGL) YouTube and other subscription video-on-demand services as an example, Netflix (NFLX) could generate around $10 per month in ad revenue for US users and $3 per month for non-US users, Bazinet wrote. This would allow it to price the plan at $6 per month “while continuing to generate incremental revenue from basic subscriptions that will transition to a lower cost version.”

At a price of $6, it could generate between $900 million and $3.6 billion in additional cash flow and even if cannibalization were to occur, where some current subscribers switch to an ad-supported option, it could still generate between $800 million and $3.1. billion in additional free cash flow, Bazinet said.

On Monday, a new report suggested that Netflix (NFLX) could boost US revenue by 21% by introducing an ad-supported option.

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