Tadum: Netflix’s Ad Gamble. Not Picture Perfect, But Still a Must-Watch

Tadum: Netflix’s quarterly results were a bit like one of its mid-tier dramas: plenty of build-up, a few strong scenes, and an ending that left everyone arguing over what it all meant. The numbers weren’t a total flop, but they weren’t the blockbuster investors wanted either. According to Wedbush Securities, Netflix is still an 'outperform', but its picture-perfect streak has started to show a few cracks.

The brokerage trimmed its price target to $1,400 from $1,500, blaming softer margins and higher tax provisions, but said the long-term ad story remains “compelling.” Netflix’s pivot from pure streaming to ad-supported empire is now the plotline to watch.

What Happened

Third-quarter revenue rose 17.2% year on year, and operating income jumped to $2.8 billion, yet investors barely clapped. Shares dipped slightly after hours as the company admitted that margins came in lighter than expected, largely because of one-off tax costs and the ongoing costs of expanding its ad business.

Still, Netflix pulled in $10.1 billion in total revenue and ended the quarter with 291 million subscribers. That’s 13 million more than a year ago, driven by strong growth in Asia and Europe. What really caught analysts’ attention, however, was not the top line, but the quiet emergence of a second one — advertising.

Why It Matters

Wedbush believes that Netflix’s ad-tier strategy could account for 15% of total revenue by 2026, and as much as a quarter by 2028. That’s no small feat for a company that spent years bragging about never interrupting your binge with a shampoo commercial.

The shift is already showing up in the data. According to Axios, Netflix’s ad-tier subscribers grew nearly 30% last quarter, boosted by cheaper price points and new ad-tech partnerships with Microsoft. The ad-supported plan now accounts for 40% of all new sign-ups in key markets like the United States and the UK.

That is a remarkable turnaround for a business that once said ads were “not in our DNA.” Clearly, a little genetic editing can go a long way when the market cap is at stake.

The Good, The Bad, and The Bingeable

Netflix’s content machine is still humming, with hits like The Three-Body Problem and Bridgerton keeping engagement high. But the platform is starting to look crowded. Competition from Disney+, Amazon Prime Video, and even YouTube means streaming growth is slowing. The ad business is Netflix’s way of monetising its massive audience more creatively — or cynically, depending on your view.

Wedbush notes that ad revenue per user is still “materially below” the competition, implying there is room to grow. But it also warned that scaling this side of the business will take time, especially in markets where advertisers are still unsure how to measure streaming engagement versus traditional TV.

Meanwhile, content costs continue to rise. With production budgets for top-tier series topping $15 million per episode, Netflix’s free cash flow is increasingly being eaten alive by its own ambition.

Here's Where It's Getting Messy

Netflix’s ad-tier growth looks great, but it may be cannibalising premium subscribers. According to Bloomberg Intelligence, a growing number of users are downgrading rather than joining fresh. That’s fine for revenue in the short term, but if the premium tier starts to stagnate, the pricing model could lose its shine.

There’s also a looming question about Netflix’s global tax bill, which jumped by over 200 basis points this quarter. Management blamed a “regional reclassification,” but analysts suspect it reflects higher European income — where tax rates are less friendly than in California.

Then there’s the ad infrastructure itself. Netflix’s partnership with Microsoft for ad delivery has worked smoothly so far, but insiders told The Information the company still lacks a robust in-house data layer. Without it, Netflix could struggle to compete with Google’s and Amazon’s AI-driven ad engines.

The Bottom Line

Netflix is no longer just a streaming company; it’s an ecosystem trying to straddle entertainment, technology, and advertising, without tripping over itself. The stock has rallied nearly 60% this year, and Wedbush still thinks there’s upside, but the easy money has already been made.

The ad business has potential, but it’s not a guaranteed hit. Investors want to know if Netflix can maintain its storytelling magic while learning the cold, analytical language of CPMs and click-through rates.

For now, Netflix remains what it’s always been: a great story with the occasional plot twist. Just don’t skip the ads.