The Impact of Netflix’s New Ad Tier Is a Mystery, But Not for Much Longer

Netflix investors should pay attention to subscriber count, churn rate and content cost in Jan. 19's earnings report.

The stock trading graph of Netflix seen on a smartphone screen.
Netflix stock is less than half what it was in 2021. SOPA Images/LightRocket via Gett

Netflix has made major strategic changes over the last few months, and next week investors will see how they impact the company’s financials. Netflix is scheduled to report its earnings for the last three months and the 2022 fiscal year Jan. 19.

The company released its ad-supported tier in November, leaning into the traditional television revenue model it meant to replace. It costs $6.99 per month, compared to $15.49 for Netflix’s most popular ad-free plan, and is playing 4 to 5 minutes of advertisements per hour, a length established by its competitors who previously adopted an ad model. Beginning this year, the company will also charge additional fees for password sharing. The company tested the fee at $2.99 per month but has not yet announced the official price.

Analysts don’t agree on how the ad plan will impact the financial future of the company. The range of estimates for earnings per share, a key profitability measure, is twice as wide as the range in previous quarters, including this time last year. That’s because the financial impact of ads is a “big unknown” to anyone outside Netflix right now, said Guy Bisson, executive director of Ampere Analysis, a U.K.-based data and analytics firm. The ad-tier was reportedly off to a sluggish start with only 9 percent of new customers choosing the plan in November, analytics firm Antenna reported in December. Netflix disputed the data’s accuracy and said it is pleased with the growth it’s seen so far.

Despite the large range in earnings per share estimates, the average of 55 per share for the quarter is the lowest analysts have predicted the figure since the 2019 fiscal year, according to Seeking Alpha. The same analysts estimate revenue of $7.84 billion for the last three months, a decrease from its last reported $7.93 billion but up from the same time period last year, which was $7.71 billion.

Investors should be paying attention to subscriber count, churn rate and content cost when Netflix reports its results, Bisson said. It is likely too early to see the ad-tier have meaningful impact on Netflix’s revenue, and investors might not even see any impact for the next year. But Netflix isn’t looking for huge growth strides right now, he said. It’s looking for customer retention and stability. An increase in earnings per share, reduction in churn and slowed content spending could show this, he said. For the first time, Netflix isn’t releasing its predicted subscriber growth numbers.

After reaching a high of $690 per share in October 2021, Netflix’s stock is now less than half of that at $330 per share, as of Jan. 12. The stock experienced two significant drops last year—by 30 percent in January and another 40 percent in April—both from failing to meet analysts’ expected earnings. The stock could move again later this month based on how the company’s reported earnings compares to estimates. The Impact of Netflix’s New Ad Tier Is a Mystery, But Not for Much Longer