Netflix running ads may have one big downside effect: analyst

Netflix Co-CEO Reed Hastings dropped a bombshell on investors on the company's late Tuesday earnings call — a potential cheaper, ad-based streaming subscription as a means to jump start growth.

But while this may give Netflix (NFLX) a financial boost when the service launches sometime in the next two years as hinted by Hastings, one top tech analyst said the offering could have an unintended negative consequence.

"Netflix is also considering an ad supported cheaper version that may launch over the next couple of years, which we actually view net negatively (we believe it cheapens the brand and the product vs. the current great consumer experience and introduces ad volatility to results)," warned Pivotal Research analyst Jeff Wlodarczak.

The push for new growth is now paramount for Netflix and Hastings as the company served up its second straight lackluster quarter and outlook.

"What we got to do is take it up a notch. I know it's disappointing for investors and it is for sure. But internally, we're really geared up and this is like our moment to shine. This is when it all matters," Hastings said on the call.

For the current quarter, Netflix said it expected an even steeper decline in new users as it battles through increased competition from the likes of Apple and Paramount and tries to get 100 million account sharers to pay up.

The streaming service is modeling for subscribers to decline by 2 million in the fiscal second quarter, whereas consensus analysts were looking for a gain of 2.4 million.

Shares of Netflix crashed nearly 40% on Wednesday.

Pivotal's Wlodarczak downgraded his rating on Netflix to Sell from Buy.

"From a stock perspective in a period of rising rates pushing pack profitability materially is likely to not be welcomed by the investment community. This overhang will likely be exacerbated by investor concerns that: 1) company will have sub losses in 1H of ’22 and streaming appears nearly fully penetrated globally post Covid (making this about converting pirates or taking share or price increases), 2) the increasing effects of competition as competitors launch their services globally some of which again may not be focused on piracy or even profitability in the case of Apple or Amazon, 3) heightened investment in growth would appear to up the expense hurdles for all the players in streaming leading to even further potential cost inflation (offset partially by even higher barriers to entry) and 4) against this backdrop the major streaming players are arguably not cheap," Wlodarczak said.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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