Netflix Stock Jumps After Reporting Nearly 5 Million Customers on Ad Plan, With Over 25% of New Subscribers Taking Ad-Supported Tier

Shares of Netflix jumped Thursday, closing up 9.2%, on news that the streamer had signed up almost 5 million customers for its ad-supported plan in the first six months and that more than 25% of new signups are on the advertising tier.

At Netflixs first-ever upfronts event Wednesday held virtually the company announced that it had signed up nearly 5 million global monthly active users following its initial introduction in early November 2022 in 12 countries, including the U.S. About 80% of viewing by subscribers who are on the ad plan is on a TV, and the median viewer age of ad-tier customers is 34, according to the company.

Until now, Netflix hasnt provided detailed info on the traction of its baby steps into the advertising biz, and the 5 million figure along with the relatively strong 25%+ take rate clearly spurred enthusiasm among investors. We are just getting started, Peter Naylor, VP of global advertising sales at Netflix, said at Wednesdays virtual upfront.

Netflix Basic With Ads launched in the U.S. on Nov. 3at $6.99 per month (30% less than the the regular Basic plan without ads, at $9.99 per month). The ad-supported package is available in Australia, Brazil, Canada, France, Germany, Italy, Japan, Mexico, South Korea, Spain, the U.K. and the U.S.

In a broadcast-style slate announcement, Netflix detailed TV shows and movies launching this fall, including the sixth and final season of The Crown, Mike Flanagans Fall of the House of Usher, Squid Game: The Challenge and Season 5 of hit reality series Love Is Blind. It also announced the renewal of Virgin River for Season 6 and Seasons 3-4 of Ginny Georgia with no mention of the ongoing WGA writers strike during the presentation, which was shifted from an in-person event in New York to a streaming-only format because of the strike.

The Netflix upfront was largely unexciting, no different than all the other television industry gatherings this past week, LightShed Partners analysts Rich Greenfield, Brandon Ross and Mark Kelley wrote in a research note. At 5 million viewers, Netflix advertising is still in its infancy, they wrote, but one can see just how big a business advertising can be for Netflix in the next five years.

For the LightShed team, what stood out as "a watershed moment for the TV advertising business" was the announcement that marketers can now buy ads on the Netflix Top 10 daily titles, on a per-country basis. That approach means an advertiser is "always buying what people are watching and can never make a mistake that requires make-goods," they wrote. Rather than a defensive move by Netflix to enter the advertising market forced by stalling revenue growth, "when you think about the speed at which Netflix is ramping advertising ARPU and innovating, you cannot help but wonder if it ends up being an aggressive offensive move," the analysts opined.

For the first quarter of 2023, Netflix said its U.S. ad-supported tier generated more average revenue per member than its standard $15.49-per-month subscription plan. That suggests ad revenue per user was greater than $8.50/month, with even more upside potential with better targeting and flexibility on the frequency and duration of ads, according to Wedbush Securities analyst Michael Pachter.

During its upfront, Netflix also cited Nielsen stats underscoring the breadth of its content slate. The streamer has had the No. 1 streaming show for 15 out of 16 weeks in 2023 to date, and has held the No. 1 movie for 14 weeks, according to the measurement firm.

In addition, Netflix co-CEO Ted Sarandos discussed a novel ad format that would be akin to a 30-minute commercial that plays out over several days and follows subscribers as they watch different shows on the service. This isnt going to happen overnight, and maybe not even next year, he said at the upfront. Its just one idea.

Meanwhile, investors are still waiting to see what the fallout will be from Netflix's broader crackdown on password-sharing violators. Netflix had said it planned to commence a broader launch of its paid password-sharing program in Q1 but pushed that to Q2 for a broad rollout that include the U.S. The company plans tostart blocking devices (after a certain period of time)that attempt to access a Netflix accountwithout properly paying.

Netflix hopes to claim a windfall from password piggy-backers, estimating that more than 100 million households illicitly share account access. Co-CEO Greg Peters has warned that the company has seen a cancel reaction in countries where it has launched paid sharing and that broad rollout will likely hurt Q2 subscriber growth. But Netflix also has pointed to early results in Canada, where it launched the extra member option for $7.99 (Canadian) per month in February 2023. So far, according to the company, its paid membership base in Canada is now larger than prior to the launch of paid sharing and revenue per subscriber is now growing faster than in the U.S.

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