What You Need To Know
Netflix's (NASDAQ: NFLX) advertising-based plan has experienced significant growth, recently surpassing 23 million global monthly active users, as announced by Amy Reinhard, the company's president of advertising.
This milestone reflects a substantial increase from the 15 million monthly active users reported just over two months ago. Reinhard, speaking at the Variety Entertainment Summit at CES 2024, highlighted the high engagement levels of these users, with 85% streaming for more than two hours daily.
This growth trajectory is part of Netflix's strategy to scale its business while focusing on meaningful engagement and content. The ad-supported tier, launched in November 2022, now accounts for about 30% of new signups in the 12 countries where it's available. Priced competitively at $6.99 per month in the U.S., it offers a more accessible option for users, which is less than half the cost of the Standard plan.
Reinhard, who took over the ad business after Jeremi Gorman's departure, also mentioned Netflix's successful partnership with Microsoft in ad-tech. This collaboration and the overall growth of the ad-supported tier demonstrate Netflix's commitment to evolving its business model and enhancing user engagement, while keeping a focus on delivering quality content.
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Why This Is Important for Retail Investors
Diversification of Revenue Streams: Netflix's successful expansion into an ad-based plan represents a diversification of its revenue streams. For retail investors, this diversification can signal a stronger, more resilient business model. It suggests that Netflix is not solely dependent on its traditional subscription model and is innovating to capture different market segments, potentially leading to more stable financial performance.
Growth Potential: The rapid increase in monthly active users for the ad-supported plan indicates significant growth potential. This growth is a positive sign for investors, as it can lead to increased revenue and profitability for Netflix. A company demonstrating an ability to grow its customer base, especially in new service areas, is often a favorable indicator for investment.
Market Expansion and Penetration: The ad-supported plan's lower price point allows Netflix to penetrate markets and demographics that were previously untapped due to cost barriers. This expansion into new market segments can lead to a broader, more diverse customer base, reducing the risk of revenue concentration and increasing the potential for global market dominance.
Adaptation to Changing Industry Dynamics: The shift towards an ad-supported model reflects Netflix's ability to adapt to changing media consumption and industry trends. This adaptability is crucial for long-term sustainability and success. Retail investors often look for companies that are not just market leaders but also agile in responding to industry changes.
Enhanced Competitive Positioning: With the successful implementation of the ad-based plan, Netflix is enhancing its competitive positioning against other streaming services. This move may attract users from competitors and retain price-sensitive customers, contributing to a stronger market position. A company that successfully innovates and strengthens its market position can be a more attractive investment choice for retail investors, as it demonstrates strategic foresight and execution capability.
How Can You Use This Information?
Here are some of the investing ideas that can be explored using this information:
Growth Investing
The significant increase in active users and the successful implementation of the ad-based model position Netflix as a growth stock. Investors might explore this as an opportunity to invest in a company that is expanding its market reach and revenue streams, with potential for sustained long-term growth.
Growth investing focuses on stocks of companies expected to grow at an above-average rate compared to other stocks in the market; learn more in our article titled 'What is Growth Investing?'.
Momentum Investing
The positive news about Netflix's user growth and successful ad-tier expansion could create short-term momentum. Investors might capitalize on this trend, betting that the stock will continue to gain as more investors recognize and react to these positive developments.
Momentum investing rides the wave of existing market trends by buying assets that have shown an upward price trend and selling those in a downtrend.
Dividend Investing
Although Netflix currently does not pay dividends, its diversification and potential increase in revenue streams could put it on a path to eventually offer dividends. Investors interested in dividend growth might monitor Netflix as a future candidate, especially if it continues to demonstrate strong financial health and a commitment to shareholder value.
Dividend investing targets companies that regularly distribute a portion of their earnings to shareholders as dividends.
Thematic Investing
Netflix's move represents a broader trend in the media and entertainment industry towards hybrid revenue models combining subscription with advertising. Investors might consider a thematic investment strategy, focusing on companies that are innovatively blending different revenue streams to capture broader market segments.
Thematic investing selects assets based on projected trends or themes believed to offer growth opportunities.
ETFs and Mutual Funds
For investors who prefer a diversified approach, considering ETFs and mutual funds that hold Netflix as part of a larger portfolio of growth or tech stocks could be a strategic move. This allows for investment in Netflix's potential while mitigating individual stock risk. Some examples include:
Technology Select Sector SPDR Fund - XLK
Vanguard Information Technology ETF - VGT
Communication Services Select Sector SPDR Fund - XLC
Vanguard Communication Services ETF - VOX
iShares Russell 1000 Growth ETF - IWF
Vanguard Growth ETF - VUG
Invesco Dynamic Media ETF - PBS
SPDR S&P Internet ETF - XWEB
Vanguard S&P 500 ETF - VOO
iShares Core S&P 500 ETF - IVV
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What you should read next:
Renowned ETFs
Some investors prefer to invest in stocks via an exchange-traded fund for ease and reduced risk. Some popular ETFs include the following:
Large-Caps: Vanguard Mega Cap ETF (MGC) - This is a notable ETF for its focus on large-cap stocks, offering exposure to some of the largest and most stable companies.
Mid-Caps: Vanguard Mid-Cap ETF (VO) - This ETF is recognized for providing a balance between the high growth potential of small-caps and the stability of large-caps, making it a popular choice for mid-cap exposure.
Small-Caps: Vanguard Small-Cap ETF (VB) - Known for its focus on small-cap stocks, this ETF is popular among investors seeking higher growth potential.
Growth: iShares Core S&P U.S. Growth ETF (IUSG) - This ETF is well-known for targeting U.S. growth stocks, appealing to investors looking for companies with potential for rapid expansion.
Value: iShares Core S&P US Value ETF (IUSV) - Renowned for its focus on value stocks, this ETF is a common choice for investors looking for undervalued companies.
