Netflix’s reach ‘dwarfs every other media company,’ analyst says

BofA Securities Senior U.S. Media and Entertainment Analyst Jessica Reif Ehrlich joins Yahoo Finance Live to discuss the expectations for Netflix’s fourth-quarter earnings following the launch of the platform’s ad-supported tier, upgrading the stock to Buy, beating out the competition, how they aim to cut down on password sharing, and the outlook for growth.

Video Transcript

BRAD SMITH: Netflix is getting the green light from Bank of America after the bank boosted the stock from underperform to buy, citing its crackdown on password sharing and ad tier option as potentials to drive the streaming giant towards financial upside. BofA securities senior US media and entertainment analyst Jessica Reif Ehrlich joins us now. Jessica, walk us through what you're expecting to come from Netflix, especially on this ad tier side, which is, what, about a month-- well, not a full month in, but it started already.

JESSICA REIF EHRLICH: You're right. It's a few weeks in. Well, we initiated coverage. We took over the coverage from another analyst at the firm and have a really bullish view on two things, really, that are different. One is the AVOD, or the advertising platform. And the second thing is password sharing.

So on advertising, Netflix's reach, their viewership dwarfs every other media company. I mean, they're almost twice as much as the next streaming service. And I'm including all of the companies that I cover, whether it's Paramount, Peacock, which is NBCU, Warner Brothers Discovery, Disney, et cetera.

So they have massive reach, massive viewership. And obviously, they're not being monetized from an advertising perspective. And these are demographics that the advertisers want because they can't get them on linear TV. They're either cord cutters or cord nevers, or they're watching on streaming, but they tend to be younger. So they're highly attractive.

The second thing is the ad load will be very light, four to five minutes an hour versus 15 minutes plus on linear. The ads will be addressable or targeted so they're more relevant. And it's just, the combination of all of these things makes the platform extremely attractive to advertisers. And if we kind of step back and think about it, when Peacock launched at the end of 2018, they had a billion dollars in advertising commitments with negligible subs. And that's not the case with Netflix.

So they launched in 12 markets. The US is the biggest ad market. And we'll see, but they're only launching it on their basic tier, which is the lowest tier. And as they say, they want to walk-- no, I'm sorry-- crawl, walk, and run. So they started slow, and then they'll build from there. But we really think the demand will be huge.

JULIE HYMAN: Maybe run, walk, crawl is what the stock has done, Jessica, in terms of the sentiment around this company, which has swung so incredibly from the highs to lows here, and now seems to be clawing back with more optimism coming in about this new ad tier. You've got a $370 price target on the stock. What do you think is going to be the catalyst or catalyst to get it there? Is it going to be some numbers starting to come out as they start this new tier?

JESSICA REIF EHRLICH: Well, for one thing-- I mean, there's a couple of things. One is we think that the numbers have come down low enough across the Street. So there were some unpleasant surprises in the past year. And we think numbers have really been reset. Two is anything they say about advertising as they go forward. And again, they're starting with only a small portion of their base. They will eventually roll it out to standard and premium.

We're 100% confident in that because they're hiring extremely well. They've hired across digital media companies. They've hired really well from everyone we talk to in the advertising industry. So they're really building for a reason. And of course, they have a Microsoft guarantee.

So first thing is AVOD. Second thing, I would say the password sharing over the next one to two years is going to be a big deal. Netflix says there are 30 million you can subs who watch for free or not paying, or as they call it, borrowers, and 100 million worldwide. Who doesn't know a password sharer?

So there are ways that they can crack down and cut off people who are not paying for the service. And so whether they get $2 because they are an extension of existing subs, or people really sign up with a full profile and pay a higher price, that is complete upside for them. And you can make assumptions, 25%, 50%, but it's significant.

And I'd say another point, in our view, that's a really big deal is free cash flow is about to explode. This year, they've guided to a billion dollars in free cash. And our projection is that will reach $4 billion over the next three years. So it's really in just the beginning phases of the free cash flow growth.

BRIAN SOZZI: Jessica, looking out a little bit longer term, do you think Netflix, just given its relationship with Microsoft, that's where Netflix might ultimately live, inside of Microsoft?

JESSICA REIF EHRLICH: It's funny. People have asked what Netflix might buy, but it's interesting you ask it that way because we do think Netflix is an incredibly attractive target. And it could be Microsoft. It could be many other companies. I can think of many companies that would love to have that network-- I mean that Netflix platform.

BRIAN SOZZI: All right, we'll leave it there. Jessica Reif Ehrlich, BofA securities senior US media and entertainment analyst, good to see you. Have a great weekend.

JESSICA REIF EHRLICH: You, too.