23 million reasons to watch Netflix stock in 2024

streaming pioneer netflix (NFL -0.19%) Thanks to its vast library of original and licensed content, viewers have long considered it the best streaming option.

But as the cord-cutting trend has become more mainstream, a slew of competing services have been launched, many of them by entertainment giants that have massive amounts of high-quality intellectual property of their own. Additionally, Netflix’s licensing rights to some popular shows and movies will be returned to their original owners. The resulting surge in competition forced Netflix to seek growth from other sources.

Over the past few years, the company’s revenue growth has relied on heavy investments in original content to drive people to subscribe, along with recurring subscription price increases. However, many competing platforms also offer original content, and raising subscription fees too much risks causing mass churn among subscribers.

About a year ago, Netflix launched its latest tool for monetizing and growing revenue: a low-cost subscription service with ads.

Earlier this month, a CEO shed light on the progress of Netflix’s advertising business. Let’s take a closer look and evaluate whether now is a good time to buy Netflix stock.

New year, new Netflix?

In November 2022, Netflix began offering commercial ratings in 12 countries. These are just a few of the 190+ countries in which we operate.

Seeing ads while watching a show or movie can be distracting, but the carrot is that this tier is Netflix’s cheapest pricing plan. Anecdotally, the streamer’s price increases pushed them to their limits, but canceling them outright didn’t seem like the optimal solution. So when the company launched its ad-supported tier, I jumped at the chance to change my subscription.

It’s been a year since Netflix launched this new look, but I can’t say I’ve noticed any major changes. And it’s not just me. Netflix boasted 15 million monthly active users (MAUs) globally in its advertising tier, according to a note issued by the company last November. Moreover, in the company’s third quarter earnings report, management stated that 30% of new sign-ups were in the advertising tier.

While this growth is encouraging, recent announcements from the company have raised some eyebrows. According to recent comments from Amy Reinhard, Netflix’s president of advertising, the company’s advertising tier currently has more than 23 million MAUs.

Not only is this a notable increase compared to November, but the influx of new subscribers to this plan is also coming at a very interesting time.

Image source: Getty Images

Why Netflix Could Profit from Advertising in 2024

One of the most important aspects for investors to understand when it comes to advertising is that spending is cyclical. And 2024 will likely be the year that advertising spending surges, considering the election cycle is just getting underway.

According to a report from AdImpact, U.S. political campaign ad spending is expected to surpass $10 billion this year, reaching its highest level ever.

The majority of that spending is expected to be allocated to broadcast and cable TV, but $2.5 billion is expected to be spent on advertising on connected TV devices and digital platforms, according to the AdImpact report.

I think political campaigns and brands in general will want to reach the eyes of more and more people who subscribe to Netflix’s advertising tier. So in 2024, you can make a more meaningful contribution to your finances through ad-supported subscriptions.

Should you invest in Netflix stock?

NFLX PE Ratio (Forward) Data from YCharts

As a growth stock, Netflix often trades with unmanageable volatility. It seems like every quarter, investors cheer or mock a company based on its subscriber growth numbers. But over the long term, Netflix has proven in many ways that it can generate meaningful growth. Netflix is ​​currently trading at a forward price-to-earnings multiple of 30.1. This is well below the company’s three-year average of 37.1.

Considering that advertising has been a feature of the platform for a little over a year and has only been used in limited ways, it’s unlikely that this new product will make a difference just yet. However, there are clear signs that more people are choosing this option, and this could be a long-term catalyst for their finances. Additionally, success in a few markets will allow us to gradually expand this product to more geographies.

As more people sign up for Netflix’s ad-supported tier, the company will eventually be able to demand more attractive pricing terms from marketers and brands looking for additional surface area on the streaming giant. There’s still a lot to prove, but early signs suggest Netflix’s bet is paying off. Overall, I’m optimistic that advertising will become a meaningful driver for streamers in the long term, and I think 2024 could be a good year for the company.