Netflix stance on ads 'materially value-destructive,' says Needham

Netflix (NFLX) not taking advertising dollars lowers the return on invested capital "materially" for investors, lowers the company's valuation multiple compared with dual revenue stream business models, and funds its subscription video-on-demand competitors, thereby undermining its ability to win the "Streaming Wars," Needham analyst Laura Martin tells investors in a research note. At traditional linear TVs $70 per year per subscriber of ad revenue, Netflix is forgoing advertising revenue of $14B per year, thereby ignoring 56% potential upside to its 2020 reported sales, sales the analyst. At Roku's $40 per year per subscriber of ad revenue, Netflix is forgoing advertising revenue of $8B per year, adds the analyst. She believes Netflix's stance that it will never have ads in its content is "materially value-destructive." It is also "value-creating" for direct competitors including Comcast's (CMCSA) Peacock and Discovery's (DISCA) Discovery, says Martin. She believes adding an "ad-light" tier could be structured as a new lower-priced option, which could expand Netflix's total addressable market and add new price-sensitive customers, not cannibalize its high-priced current subs. Martin keeps an Underperform rating on Netflix.