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Netflix ad tier: Analysts bullish as streaming giant unveils key details

Netflix stock (NFLX) closed more than 5% higher on Thursday as investors received more clarity on the platform's upcoming advertising tier.

Shares leveled out on Friday, trading relatively flat in mid-morning trading, as analysts weighed in on Netflix's much-anticipated announcement.

In a new note to clients, UBS analyst John Hodulik increased his price target on the stock by $52 to $250 a share on a belief that Netflix's ad tier "will be accretive to [long-term] revenue & profitability," estimating that the ad tier could provide a 10% boost to total revenue in the coming years.

Hodulik also cautioned that the business will likely take time to scale with foreign exchange pressures and other macroeconomic headwinds weighing down near-term benefits.

JPMorgan analyst Doug Anmuth, who maintains a Neutral rating on the stock with a $240 price tag, added that the ad tier's lower price point ($6.99 in the U.S.) indicates Netflix's confidence in advertising revenue.

On a call prior to the announcement, Netflix Worldwide Advertising President Jeremi Gorman said the platform "nearly sold out all of its [ad] inventory" globally for launch — bucking the trend of a global ad spend slowdown.

The company also shrugged off concerns about consumers trading down to the ad tier.

"We're not trying to steer people to one plan or the other," Netflix COO Greg Peters said on the call. "We think the revenue model will be fine as a result."

Elsewhere on Wall Street, Citigroup maintained its Buy rating on the stock while Wedbush reiterated its Outperform rating.

"Bling Empire" on Netflix. (Netflix)
"Bling Empire" on Netflix. (Netflix)

'Everything people love about Netflix'

The company's ad plan, dubbed "Basic with Ads," will cost $6.99 a month in the U.S. and officially launch on Nov. 3 at 9AM PT — just ahead of Disney's ad-based offering on Dec. 8 (which will be priced at $7.99.)

"Basic with Ads" will complement Netflix's existing ad-free tiers and be available in 12 countries, including the U.S., the U.K., Australia, Brazil, Canada, France, Germany, Italy, Japan, Korea, Mexico, and Spain.

The tier will roll out in several stages with Canada and Mexico being the first two countries to access the new offering on Nov. 1. All other eligible countries, excluding Spain, will see a Nov. 3 launch date with Spain rounding out the rollout on Nov. 10. Pricing will vary depending on the country.

Netflix revealed that a limited number of movies and TV shows won't be available for users in the ad tier due to licensing restrictions, estimating that about 5% to 10% of overall programming won't be available depending on the country. The platform said it will look to reduce that number over time.

"Basic with Ads" users will also not be able to download titles due to "technical complexities."

Netflix is currently utilizing a fixed price model for advertisers (it would not reveal its cost-per-thousand rate), but said it's open to adjusting that model in the future.

"Basic with Ads" will feature an average of 4-to-5 minutes of ads per hour with tight frequency caps so members won't see the same ads repeatedly. At launch, ads will run 15 or 30 seconds in length, with some running prior to the start of a program while others will be mid-roll ads.

"In the grand scheme of things, it's a very pro-consumer approach," Peters said, emphasizing that the ad experience was "thoughtfully" created.

"In short, Basic with Ads is everything people love about Netflix, at a lower price, with a few ads in-between," the company said in a blog post, crediting its partnership with Microsoft (MSFT) for the ad tier's quick 6-month turnover. Microsoft generated $10 billion in advertising sales last year, and was announced as the streamer's technology and sales partner in July.

Netflix plans to lean on Nielsen's Digital Ad Ratings system, which will become available some time in 2023, to help advertisers better understand how the platform can reach their target audience.

Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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