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Why Netflix’s Ad-Supported Subscription Tier Could Be a Hit With Gen-Z

BofA Securities analyst Jessica Reif Ehrlich set her price target on Netflix stock at $370, a roughly 20% upside from where shares currently trade.

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While some analysts are worried that
Netflix’s
new lower-cost, ad-supported tier could cause problems for the company, an analyst at BofA Securities says it could be a way for the streaming giant to attract younger viewers.

Earlier this month,
Netflix
(ticker: NFLX) launched a lower-cost streaming option for subscribers in the U.S. that allows them to watch shows such as Stranger Things with advertisements.

Despite Netflix’s most recent earnings showing a jump in subscribers, the company has struggled with growth in the past year. Whether or not this ad-supported tier will help the company grow subscribers is up for debate. Bears say the option could prompt subscribers to switch from more expensive subscriptions to the least expensive one. On Tuesday, BofA Securities analyst Jessica Reif Ehrlich joined the debate on the side of bulls, saying that the new subscription tier will provide “significant potential operating and financial upside.” Ehrlich reinstated coverage of shares with a Buy rating.

In a research note, Ehrlich says that the new offering will boost Netflix’s ability to reach “highly attractive and younger demos who have cut the cord or were never part of the linear pay-TV universe.” Younger demographics, such as those in the Gen-Z age group, generally have less disposable income than older age groups, Ehrlich says, and therefore a less expensive option will appeal to them.

Ehrlich also notes she’s confident in the company’s ability to crack down on password sharing, which she says is an “enormous potential long-term opportunity, with sizable upside realized in 2023/2024.” There are about 100 million possible subscribers that are potentially lost as a result of password sharing, Ehrlich says. She believes the company should be able to convert many of those people into paying customers, which would boost subscribers and revenue.

Ehrlich set a $370 price target on Netflix stock. Shares jumped 3.3% in Tuesday trading to $309.14 and were on pace for their highest close since April.

Not everyone is as confident in Netflix’s near-term future. Earlier this month, Needham analyst Laura Martin wrote that revenue growth could become negative in the fourth quarter or in 2023 if “more $16-a-month or $20-a-month U.S. subscribers trade down to its new $7-a-month ad-lite tier than Netflix and consensus expect.” Martin rates the stock a Hold without a price target.

Coming into Tuesday’s session, Netflix stock had risen for four straight days, its best four-day stretch since July. The stock has fallen 49% this year, the worst year for Netflix since 2011.

Write to Angela Palumbo at angela.palumbo@dowjones.com

Credit: marketwatch.com

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