Cowen senior analyst John Blackledge joins Yahoo Finance Live to discuss digital advertising for Meta and Alphabet, the level of ad-supported Netflix, and the outlook for Big Tech.
– The main averages are all in the red at all levels. The Dow Jones Industrial Average is down more than 600 points, 674 points to be exact right now, down 2.2%. The S&P 500, you see this drop here about 17 minutes after being down about 2 and 1/2%, 94 points there. And the NASDAQ Composite, at depth, is down about 2 and 1/2%, 282 points in the red.
We mentioned the S&P 500 a second ago. Only two names seem to be in positive territory. One of them, interestingly, is Twitter by day. Speaking of tech stocks, tech stocks continue to improve amid the broader market sell-off with tech giants like Meta, Alphabet and Netflix all down significantly year-to-date. Cowen Senior Analyst John Blackledge joins us now for discussion here.
And we had seen some of these tech stocks move in lockstep, especially with what the Fed was signaling. And now that the Fed made up its mind yesterday and kind of telegraphed what the way forward might look like, how do you expect tech to continue to react from here?
JOHN BLACKLEDGE: Yes, no, and thank you for inviting me. Yes, we had some notes. It’s interesting. We had some notes this morning on Alphabet and Meta. We only checked the ads in the middle of the quarter, right? With all the macroeconomic, rate and inflation, geopolitical headwinds, we’re just curious. We checked with our agency that we use, our digital ad agency, to see where we stood on Meta and Alphabet 2Q through May. It was interesting, for Meta, our agency saw ad spend drop about 4% through May. We have for the full quarter plus 2%. So it follows below where we are for the full quarter.
But remember, last year iOS 14.5 changes started in 2Q ’21. So comps become easier for Meta as we go through the quarter. So probably our numbers are probably still OK. Going forward, it’s a bigger question. And the question would be about ad demand with rising rates and all the macroeconomic headwinds. And we’ll try to look at that as we go through the second half of this year and into next year.
And then for Google, Google search, our agency check grew 18% through May. We are at 16% for the full quarter. So, you know, kind of a follow-up that’s relatively consistent with where we’re at. And that’s a bit of a deceleration from the first quarter growth rate. So, you know, it seemed — despite everything that’s going on — the numbers for both companies seem to follow — the short-term numbers seem to kind of follow where we’re at.
JULIE HYMAN: Hi John. This is Julie here. However, when you look at that ad spend, is there a direct correlation between higher rates and slower ad spend? I mean, and a direct correlation across multiple layers, okay, if higher rates affect consumer spending on the margin, then it affects those companies and then it affects what they spend on advertising. Do you expect to see more severe feeding as rates continue to rise?
JOHN BLACKLEDGE: Yeah, historically for advertising, there’s a direct correlation to GDP growth. So to the extent that the higher rates lead to some sort of slowdown or decline in GDP – people are calling for a recession at some point, maybe halfway through this year and next year – yes, and so if you look, you know, I think what matters is what will be the profit of these companies next year? Are rising rates and macroeconomic headwinds factoring into stock prices right now?
If you look at, take Alphabet, during the recession of 2008 and 2009, they obviously see demand go down during that time. And they’re holding back costs, cost growth. In 2009, their cost growth was 0%. And their revenues were kind of in line with 2008 levels. And as 2008 came into 2009, you saw cost growth slow down and then flatten out in 2009. So I think for those companies, and you also saw in 2020 when COVID hit, Alphabet and – and Facebook was not public during the 2008 recession – their cost growth really dampened costs. So that’s what we’re going to look for. And they’re going to see slower demand before any of us see it. And then I think they will act accordingly.
And even for Meta, you know, they lose a lot with their Metaverse investments. And you hear, you see reports since they reported 1Q that they are slowing down hiring. So we will have to see. But in the short term, it looks like things are sort of where we think they should be. But, of course, there are interest rates and all the headwinds are clearly going to be there for a while. And so we’ll try to do our best to plan through the year and into next year.
– John, how bad does it get for Netflix in a recession?
JOHN BLACKLEDGE: It’s interesting. We’ve done a ton of work on their potential ad activity, we posted it yesterday. And I would say what’s interesting is that we think they’re going to introduce an advertising level. Our work, and we do a lot of surveys, exclusive monthly surveys at Cowen. And our work has suggested that if they introduce a new cheaper ads tier, they could add up to 4 million new members in 2023. And we think they’re going to introduce the ads tier at the end of this year, in the fourth quarter.
So 18% of non-member respondents said they were extremely or somewhat likely to sign up for a new, cheaper ad tier. What does that mean? Well, that means from a revenue perspective, we get about $900 million in additional revenue from those members. And what does it look like?
Well, we’re getting about $17 in revenue per member per month for a new ad tier. And that breaks down to a $6.99 subscription, which is pretty much where other premium streaming platforms are. It’s also 30% below Netflix’s base tier, which is its lowest price tier. And then we got to about $10 a month on the advertising side.
But to the question, you know, if they have a new level of ads, will it be cheaper for new members or if existing members want to switch. Like, for example, we also asked existing members, how would you upgrade to a lower priced ads tier? And 41% said they would change.
And you probably know that Netflix currently has three tiers: basic at $9.99, standard at $15.49, premium at $19.99. And half of basic members and 40% of standard and premium members said they would switch. So if they change — and what’s interesting with the member base change, the $9.99, they pay $9.99, they would feel good about going to $6.99.
– But John, but John, let me ask you this. Because isn’t it a big longer term risk for Netflix if you have people dropping from higher price tiers only to those lower price tiers? Doesn’t that cause their margins to drop over time? Is it hurting their cash flow?
JOHN BLACKLEDGE: No, that was all with our work yesterday. Take for example switches, which we were interested in. I think that’s an excellent question. We think they will generate around $17 per member per month for an advertising tier.
Blended RPU for the company was around $15 in the US and Canada in Q1. So net net, it’s going to be incremental. And after we did the work, we were talking about it saying they probably should have done it sooner. So no, I think it will be net net extra. And that was… that’s why we called yesterday. This is a positive multi-year revenue opportunity for the company.
JULIE HYMAN: John, always good to catch up with you, especially right now given what we’ve seen in technology. Stay strong, man. John Blackledge, good to see you.
JOHN BLACKLEDGE: Thanks.