Is it a Wise Investment Decision to Buy Stock Now that Netflix’s Ad Business is Flourishing?

Every year, publishers and advertisers from all over the world gather for a major advertising event known in the industry as Upfront. The event is an opportunity for cable networks and ad-supported streaming services to sign deals with major advertising agencies, ultimately bringing more ad revenue to their platforms. Netflix has always been absent from industry events until this year. Even though it’s been less than a year since the ad-supported tier was established, the company is making its first appearance at the event.

Netflix released encouraging data about a successful start to its advertising business. CNBC reported on Thursday that the company revealed a number of key facts about its advertising business to investors this week. First, the company said its ad-supported service now has 5 million active users. Additionally, in markets where the new tier is available, one in four new subscribers signs up for this ad-supported service with a lower subscription fee than other plans.

It’s no surprise that Netflix’s stock has surged following the news that its advertising business is off to a big start. Management has stressed in recent earnings calls that the ad-supported economy is doing well. In fact, management said on the company’s first-quarter earnings call that its ad-supported tier in the U.S. is already generating more revenue per member than standard subscription-based plans. So a fast-growing new business with good economics could be a big catalyst for the company and its stock price.

Netflix’s chief financial officer, Spence Neumann, said during the company’s earnings call in January that the company’s advertising business could grow to “at least” 10% of its revenue, and “hopefully more over time” as the business matures. The company said it believes it has “significant growth potential.” With so many new subscribers choosing Netflix’s inventory, it’s no surprise that the company’s ad revenue could rise to 10% of revenue within the next five years.

With ample evidence of the initial success of the company’s early advertising business, it certainly gives investors more reason to be optimistic about the stock’s long-term potential. But is the stock cheap enough for investors who want to hold the stock for the long term? The stock is trading just 25 times the consensus estimate of analysts’ earnings estimates for Netflix next year. This is because the company is expected to demonstrate significant operating leverage from now until the end of 2024, with its advertising business and other initiatives simultaneously driving revenue growth.

Considering all these factors, Netflix’s stock could be more attractive than it seems at first glance. This stock is certainly not one to buy out loud, but investors may want to at least take the time to delve into the stock to determine if it’s worth adding to their portfolio.

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