Netflix's upcoming advertising tier will boost subscribers, narrow free cash flow gap
Wachiwit/iStock Editorial via Getty Images

Netflix (NASDAQ:NFLX) surprised investors last month when it said it lost 200,000 subscribers in the first-quarter, prompting the company to say it will introduce an advertising-supported option. This new subscription tier is likely to reinvigorate subscriber growth and narrow the gap between free cash flow and net income, investment firm Citi said.
Analyst Jason Bazinet, who rates Netflix (NFLX) shares buy with a per-share price target of $295, noted that due to the lack of free cash flow, value investors are not sure how to assess the firm and with the lack of subscriber growth, it does not have a "natural investor base."
"We believe an ad based tier â which we expect in 2023 â will allow Netflix to resume sub growth and help narrow the ~$5 billion gap between FCF and net income," Bazinet wrote in a note to clients.
Netflix (NFLX) shares fell nearly 1.5% to $184.84 in premarket trading on Tuesday.
As for the company's other initiative, further increasing the monetization of account sharing, Bazinet is less optimistic, noting it is "unlikely to improve beyond current levels."
Citing Google's (GOOG) (GOOGL) YouTube and other subscription-video-on-demand services as an example, Netflix (NFLX) could generate around $10 per month in ad revenue from U.S. users and $3 per month from non-U.S. users, Bazinet wrote. This would allow it to price the offering at $6 per month "and still generate incremental revenues from Basic subs that spin down to a lower cost version."
At a $6 price point, it could generate anywhere between $900 million and $3.6 billion in additional free cash flow and even if cannibalization were to happen, where some current subscribers move to an ad-supported option, it could still generate between $800 million and $3.1 billion in additional free cash flow, Bazinet opined.
On Monday, a new report suggested that Netflix (NFLX) could boost U.S. revenues by 21% when it introduces an ad-supported option.