There is good news for the shareholders of embattled streaming giant Netflix, if a report by JPMorgan analysts turns true. A client note issued by the brokerage on Monday said Netflix, which witnessed a massive share plunge that destroyed investor wealth, will rake in millions from advertising.
Analyst Doug Anmuth at JPMorgan says Netflix will be able to attract 7.5 million subscribers when it launches its ad-supported tier in its US and Canada segments in the next year. This will account for about $600 million in new advertising income. According to Anmuth, Netflix's revenue from an ad-supported tier will be a whopping $2.65 billion. This service will have some 22 million subscribers at that point, the analyst says, according to Yahoo Finance.
Shares Plunged in April
Netflix shares plummeted last April when the streaming giant reported a first ever global decline in subscriber numbers. Shares plunged 25 percent on a single day, nosediving from $348 to $226 in one single day after data showed the customer base shrank by 2,00,000 subscribers during the January-March period.
The Netflix share sell-off continued in the months that followed, hitting a low of $166 levels before stabilizing. On Monday, the stock closed at$229.98, compared with $587.37 at the beginning of the year. As the shares lost more than half its value, investors lost more than a cumulative $150 billion.
Drop in Subscriber Numbers
The share sell-off was triggered by the drop in subscriber numbers. However, investors were spooked by Netflix's disappointing outlook of its subscriber numbers. The company said it was anticipating as many as 2 million subscribers to leave it in the April-June period. This had contrasted with adding more than 18 million subscribers in 2021, which was in turn followed by a gigantic 36 million new subscribers during 2020.
The major reason behind the sharp drop in numbers was the streaming service's decision to pull out from Russia in the aftermath of Moscow's Ukraine invasion. Netflix lost a whopping 700,000 subscribers after it pulled out of Russia. As of the end of March, Netflix has a global customer base of 221.6 million.
Another reason behind the decline in its customer base was the fact that Netflix has been seeing stiff competition in the market in the last two years. Rivals like Disney Plus, HBO Max, Peacock, Paramount Plus, Apple TV Plus and Discovery Plus have been making steady inroads into the fast expanding streaming market.
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FED'S BRAINARD WARNS HIGHER RATES WILL FURTHER SLOW US ECONOMY
Dimon's comments came after the September jobs report, released last Friday, showed that businesses kept hiring at a brisk pace, unemployment fell back to a half-century low and average pay rose.
Still, the jobs report raised concerns that the Federal Reserve was making little progress in its fight against inflation. With the Fed more likely to keep raising borrowing costs rapidly, the risk of recession will also rise.
Employers did pull back slightly on hiring last month, and average wage gains slowed. But economists say neither is falling fast enough for the Fed to slow its inflation-fighting efforts.
FILE: The Marriner S. Eccles Federal Reserve Board Building is seen on September 19, 2022, in Washington, DC. (Kevin Dietsch/Getty Images / Getty Images)
As a result, another hefty rate hike of three-quarters of a point — a fourth consecutive one — is likely at the Fed's next meeting in November.
The Fed's rate hikes are intended to cool the economy and tame inflation. The increases have, in turn, led to higher borrowing costs across the economy, notably for homes, credit cards, and business loans.
Dimon said the Fed, in hindsight, "waited too long and did too little."
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"But they're clearly catching up. They're clearly motivated to catch up," he said. "And, you know, from here, let's all wish him success and keep our fingers crossed that they managed to slow down the economy enough so that whatever it is, is mild – and it is possible."
Job Cuts in May
In May, Netflix said it was cutting 150 jobs as it figured out that a drain in subscriber numbers was hitting outlook and revenues. The job losses were mainly in the US and Canada, comprising about 2 percent of Netflix's North American workforce.
There have been expectations in the market about the ad-tier model of Netflix. Shares have been on an upswing in recent months, knocking up a 19 percent gain the last three months alone.
"Given Netflix's recently muted sub growth, advertising is critical to re-accelerating revenue, expanding Netflix's SAM [subscription addressable market], and driving greater profitability ... The Netflix narrative has shifted from slow/no sub growth on the current business to advertising and paid sharing coming in 2023," the analyst said, according to Yahoo Finance.
