Shares of Netflix (NFLX) are on the rise after several media outlets reported that the streaming media giant is raising its U.S. monthly subscription prices by 13%-18%. This is the first time that price increases will affect all 58M U.S. subscribers, the number the company reported at the end of September. In a research note following the news, Piper Jaffray analyst Michael Olson told investors that ongoing price increases make sense, should be expected and should have a limited impact on customer turnover or net subscriber growth.
PRICE HIKE: Netflix is raising its U.S. prices by 13%-18%, its biggest increase since the company launched its streaming service 12 years ago, according to the Associated Press. The price of the most popular plan will see the largest hike, increasing to $13 per month from $11 per month, the publication noted, adding that the extra cash should help pay for Netflix's huge investment in original shows and films, and finance the debt it has assumed to ward off rivals such as Amazon (AMZN), Disney (DIS), and AT&T (T). Its cheapest plan is going up by $1 to $9 per month, and its premium plan offering ultra-high definition will increase to $16 from $14.
PRICE INCREASE A POSITIVE: As consumer content dollars shift from traditional video to streaming and as Netflix commands a larger share of viewing time due to an improving content slate, ongoing periodic price increases make sense and should be expected, Piper Jaffray's Olson said in a research note to investors following the news. The analyst highlighted that surveys of Netflix subscribers that he has conducted in the past six months show that the perception of content quality on Netflix has improved and subscribers are currently willing to pay, on average, $15/month for the service, with the standard plan now being raised to $13. From a customer turnover, or "churn," standpoint, in late 2017 Netflix raised U.S pricing by $1/month and there was no change in net subscriber growth, he added, pointing out that U.S. net subscriber growth has remained between 10%-12% from the second quarter of 2017 through the most recent quarter. Based on the increased pricing, the analyst believes Netflix U.S. average revenue per user should rise by about 20% over the next two years. Olson reiterated an Overweight rating and $430 price target on Netflix shares. Also commenting on the news, Goldman Sachs analyst Heath Terry noted that the U.S. price increase follows a series of price increases in international markets, most recently in Canada in November, where plan prices rose 11%-27%. The analyst also told investors that he believes the price increases reflect the incremental utility that subscribers see as hours of consumption per user rise with the growth in Netflix’s content library and distribution ecosystem. While any price increase, particularly one this significant, is likely to be met with increased churn, Terry expects the value Netflix offers to subscribers and the strong content slate in the year ahead to largely offset that. Further, the analyst believes that the increasing value in the basic single stream plan is likely to drive down password sharing as users migrate down from higher priced multi-stream plans, driving incremental subscriber growth. Overall, Terry argued that the company should use this incremental revenue to further invest in content, technology, and to a lesser degree marketing, while maintaining its commitment to 13% operating margins in 2019. The analyst increased his 2018-2020 revenue and adjusted EBITDA estimates by an average of 3% and 4%, respectively, and raised his price target on Netflix's shares to $420 from $400. Additionally, Terry kept a Buy rating on the stock and maintained Netflix on his firm's Conviction List.
PRICE ACTION: In afternoon trading, shares of Netflix have gained about 7% to %355.84.
Netflix
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