Last week, Netflix (NASDAQ: NFLX) announced it was hiking prices. While the move may be jeered by its 100 million-plus subscribers, it was cheered by Wall Street, as the stock appreciated 7.4% by the end of the week.
The move seemed to surprise people -- not because Netflix raised prices, as its high multiple always implied further price increases were possible -- but rather, how soon the hikes came after the last one, which was just in the spring of 2016.
Over the summer, I postulated Netflix's intrinsic value using some very general assumptions. One can only guess as to Netflix's true potential, as the worldwide streaming market is vast, and Netflix's management has a history of blowing past expectations. Now that Netflix is jumping on the price hike-train sooner than I thought, it's quite possible the company will be more profitable than I assumed, especially when one looks to 2025. Here's how the new hikes affect my value assumptions.
The numbers
| Plan | Terms | Old Price | New Price |
| Basic | One device, Standard Definition | $7.99 | $7.99 |
| Standard | Two devices, High Definition | $9.99 | $10.99 |
| Premium | Four devices, Ultra HD | $11.99 | $13.99 |
While only $1-$2 dollars, the increases represent a 10% and 16% hike. This is pretty rich when you consider inflation has failed to get over 2% since the financial crisis, and even more stunning considering 2016's Standard Plan increase was 25%, from $8 to $10.
To everything, churn, churn, churn
The big question is whether the price hikes will lead to increased customer churn. I don't think so. In 2016, Netflix actually did experience an increase in churn when it raised prices, but that was only a hiccup on the way to continued subscriber growth over the next year and a half.
Netflix also learned some lessons from its 2011 Quickster debacle, when it hiked prices far too drastically, and subscribers fled in droves. You can be sure the company has a whole lot of data and had a lot of conversations about how and when to hike (not coincidentally, it's doing so just as the second season of hit show Stranger Things is about to drop).
How it affects Netflix's value
In my previous article, I came out with a base, bull, and bear case as seen below, using Disney as example numbers in net margin percentages and price-to-earnings multiple.
| 2025 Assumptions | Base | Bear | Bull |
| Monthly Pricing | $13 | $10 | $15 |
| Worldwide Subscribers | 215 million | 180 million | 300 million |
| 2025 Revenue | $35.5 billion | $21.6 billion | $54 billion |
| Net margins (Disney) | 16.6% | 16.6% | 16.6% |
| 2025 Net Income | $5.6 billion | $3.6 billion | $9 billion |
| P/E Multiple (Disney) | 18.5x | 18.5x | 18.5x |
| 2025 Value | $103 billion | $66.3 billion | $165.7 billion |
| Current Market Capitalization | $85.5 billion | $85.5 billion | $85.5 billion |
| Annualized Return | 2.3% | (2.5%) | 8.6% |
Chart shows assumptions based on authors own calculations, extrapolated from company earnings.