Netflix stock (NFLX) is off the lows of the year, largely thanks to its upcoming ad-supported tier.
The recent rally has helped offset an otherwise brutal year for the stock. Shares were down more than 72% on the year as of May 11, but multiple analyst upgrades following the announcement of an ad-supported tier have renewed some optimism about the streaming giant's growth.
"[Netflix] is the leading streaming service globally, but they've painted themselves into this premium price, premium product corner," Mark Mahaney, Evercore ISI managing director, told Yahoo Finance Live (video above). "Offering a lower-priced ad-supported solution gets them out of that corner. That's the set-up on Netflix — a stock that's been hated but starting to turn — and I think this turn can go on for quite some time."
Mahaney, who recently upgraded the stock to Outperform and upped his price target to $300 a share, added that low expectations on the part of investors will help create further upside potential.
The analyst surmised that 20% of churn users, or users who left the service, are likely to return to Netflix with the rollout of the cheaper, ad-supported option. That could translate to 10 million incremental subscriber additions and $1 billion to $2 billion in incremental revenue by 2024, Evercore ISI estimated.
"We have seen, since the beginning of 2018, rising price sensitivity amongst Netflix customers, and we've seen declining satisfaction, at least in their most mature markets like the U.S.," Mahaney said, referencing recent company surveys.
In addition to catering to more price-sensitive customers, competitors have been able to generate $5 to $10 in ad revenue per user, according to Mahaney, making the ad-supported tier a win-win scenario for a platform like Netflix.
Netflix is looking to charge advertisers roughly $65 for reaching 1,000 viewers (a measure known as CPM or "cost per thousand"), WSJ previously reported. That charge is significantly higher than most other streaming competitors.
"We got something that addresses the price sensitivity and is also positive for unit economics," Mahaney said, adding that the full upside potential is not thoroughly captured in the company's current valuation or Wall Street's estimates.
Nevertheless, that doesn't mean the platform will return to growth.
"This is not the go-go days for Netflix," Mahaney cautioned, adding the company "won't be able to generate the kind of growth that they did so consistently over the years. But this stock can still nicely outperform from here."
Netflix ad-supported tier 'still in the early days'
Netflix estimated that its ad-supported tier will reach 40 million viewers by the end of next year, according to a recent report from The Wall Street Journal, which added that executives at Netflix and advertising partner Microsoft (MSFT) met with ad buyers in recent weeks.
"We are still in the early days of deciding how to launch a lower-priced, ad-supported tier and no decisions have been made," a Netflix spokesperson told Yahoo Finance at the time. "So this is all just speculation at this point."
As competition intensifies in the streaming space and Wall Street looks beyond subscriber counts, platforms have grown more open to exploring various distribution and pricing models in order to diversify audiences and offset shrinking growth.
Netflix planned to roll out an ad-supported tier next year — and recently announced two senior hires as part of the effort — although new reports now say the company is moving up the launch to Nov. 1 in order to get ahead of Disney's December timeline.
The ad-supported option will cost between $7 and $9 a month, according to Bloomberg, and the company plans to play four minutes of ads for every hour of content.
Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at firstname.lastname@example.org