Wall Street continues to wrestle with Netflix ad tier outlook

Yahoo Finance's Brad Smith and Brian Sozzi break down some notes from JPMorgan and Pivotal Research adding to the bull vs. bear dialogue on Netflix's upcoming ad service.

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BRAD SMITH: NFLX, I'm looking at Netflix. JPMorgan's take is that its advertising will bring in billions of dollars, still making waves this morning. Now, the bank retains a neutral rating with a $240 price target here.

And there you're taking a look at shares on the day. Of course, there's a broader based selloff, especially in tech, as we've been tracking. But NFLX shares down by about 5.8%. They had actually seen much of that kind of move higher, be priced in, intraday yesterday.

And so now it's a question of, even with this kind of bullish perspective that they have, where are some of the other bearish takes on the Street are starting to pour in that as well. And you had actually mentioned one earlier today here. That particularly coming out and saying that Netflix shares have caught a relative bid postweek, 2Q results and guidance and optimism.

However, in the end, this is not rocket science. Their move to launch an ad-supported alternative is fraught with ARPU, RPU, essentially that Average Revenue Per User, technological and financial product risk. That, I believe, had come out from, it was Jefferies earlier today?

BRIAN SOZZI: Pivotal.

BRAD SMITH: Pivotal. Pivotal Research was it. So all of that, you're starting to have a healthy bull-bear dialogue on this.

BRIAN SOZZI: Yeah, it's going to be a fun earnings report from Netflix in a couple of weeks. Because you have all this optimism. Netflix shares up now about 15% or 16% in the three months on an ad service that doesn't even exist yet and has no revenue. And then, oh, yeah, you have to have to stay focused on what this company is going to report.

And let me remind it, folks, the past three quarters for Netflix have not been good. Sales have decelerated year-over-year for the past three quarters. Margins have been under pressure. People have become more mobile, have clicked out of Netflix or flat out canceled it as prices have gone higher.

So it's an interesting time, I think, to be involved with the Netflix story. The promise might be there. But again, near term, this is not this is no longer the Netflix of old.

BRAD SMITH: It's just amount-- it's a matter of how many people, number one, opt in into that ad tier. But then additionally, the amount of advertising revenue that they actually realize from it going forward, and the number of campaigns that make their way into Netflix versus a bundle, perhaps, that comes in the future, especially from a company in Disney that we know is also going to layer on some of their ad-supported ambitions as well here within this broader streaming landscape.

BRIAN SOZZI: All right, let's stay on tech here. I'm watching a good note again from Chris Daly a Citi analyst. We frequently cite his work. I do, at least, because I think he's really on the pulse of this really great chip slowdown of 2022.

Calling out some weakness and cancellations of orders over at Analog Devices. Apparently, that has been hitting their results. But now, he's seeing that spread, especially in Europe, over at the likes of NXP Semi-- Semiconductor, and also Texas Instruments.

Now, Daly is just flat out calling this, "a downturn now hitting the analog chip space." You take this. You take weak results from AMD. You have that really disappointing quarter from Intel a couple of months ago. And this could be a very, very challenging third-quarter earnings season for chip players. Not only because the results by themselves may not be good, but the guidance may be just absolutely brutal.

BRAD SMITH: Yeah, one of the only bright spots, it seems, at this point in time, at least for the broader chip segment, is-- or maybe two of them. And one of them is years out from now. And that is kind of a multiyear, multipronged approach in the number of places that are going to bring on capacity, whether that be geographically or whether that be companies that we're talking about, and the production once that begins to ramp up. So that's long term.

Near term, what just had a ton of investment over the course of the last two years, pull forward in demand. It's the data center businesses for a lot of the companies, even that we've talked about in citing some of the own near-term headwinds that they do have.

And if you see at least some churn in the number of chips that are in those data centers and needing to upgrade those on a more regular basis, that's perhaps at least a catalyst for some stability. But then it's what's the growth potential going forward from there? And that's something that investors I believe are pricing in, and has been rattled to a great extent at this point.