Why the Netflix, Inc. (NFLX) Price Hike Won’t Matter in the Long Run
Bret Kenwell
Updated
Shares of Netflix, Inc. (NASDAQ:NFLX) are flying higher, hitting new all-time highs once again. NFLX stock hit $199.40 in early Monday trading, getting tantalizingly close to $200.
This comes after the company announced a price increase for U.S. customers. There was a time in Netflix’s history where it raised prices and saw its stock crater from $42 (split-adjusted) to sub-$10 in less than six months time. It was also a time where CEO Reed Hastings did not have the best execution in place.
Netflix Is Different Now
Now commanding a market cap in excess of $85 billion, NFLX stock is in a whole new ballpark. It’s no longer a niche content platform that’s bullied by Comcast Corporation (NASDAQ:CMCSA) and cable providers like Time Warner Cable Inc. (NYSE:TWC). It now produces its own content and has ignited the cord-cutting trend. Wireless carriers like T-Mobile US Inc (NASDAQ:TMUS) are including NFLX subscriptions with signups and analysts are calling for 100 million international subscribers by the end of the decade, (roughly double current levels).
Many investors are willing to overlook Netflix’s egregious stock valuation and cash flow issues because it looks very much like it will be the leader in the next generation of content consumption. Garnering subscribers and viewers takes money and investors are willing to overlook that. It’s sort of like the strategy Amazon.com, Inc. (NASDAQ:AMZN) had in place for e-commerce.
While many consumers’ monthly cable bills easily run to $100 or more, the $10 bill we get from Netflix is peanuts. That bill will go up $1 though, from $9.99 to $10.99. Premium plans will jump from $11.99 to $13.99 a month. Given its low price point and the fact that the U.S. is not exactly in dire straits when it comes to the economy, many subscribers seem unlikely to ditch Netflix. In fact, some could argue that rising Netflix prices could force customers into an ultimatum in the cord-cutting battle. Those that are may be likely to stick with Netflix thanks to its low price vs. cable.
Additionally, previous price hikes were met with push-back from customers. But with “House of Cards,” “Orange Is the New Black,” “Stranger Things,” “Narcos” and plenty of others, customers are likely to have a bit more patience when it comes to price hikes.
Customers Won’t Leave
Between better, stickier content and still the best bargain on the market I think Netflix will be able to raise prices with little issue. That’s important because NFLX has already committed some $6 billion on content for this year alone. Management is likely to keep spending like this to garner market share.
As of last quarter, Netflix had 104 million subs, with about 50% of those members being domestic subscribers. That figure is now higher, but for now, let’s estimate there’s about 52 million domestic subscribers. With the increase in prices, NFLX should generate about $60 million more per month, or $720 million annually. Since Netflix isn’t doing anything specific to increase this additional revenue, it should boost margins and ease its free-cash flow bleed.
Will it be enough? Not to completely erase its FCF issues, but it’s enough to put a hefty BandAid over it. Investors were fine before the price hike and will likely feel even more emboldened now.
NFLX stock has been on fire this year, climbing about 60% so far in 2017. Even more, NFLX stock is up almost 90% over the past 12 months. Now that the stock has momentum, there’s little reason to place bets in the opposite direction.
Sure, short-sellers can likely scalp a few bucks here and there. For example, it wouldn’t be surprising to see $200 act as temporary resistance. NFLX stock is close to being overbought in the short-term (blue circle) and $200 is a big, round number to target. Of course, it could go beyond $200, but either way, I wouldn’t look for much more downside below $190.
NFLX stock had been range-bound between $165 and $190 for a few months. Before acting as support though, $165 was resistance. I expect $190 to do the same. After twice acting as resistance, $190 should now become support. I would look for NFLX stock to eventually pull back to this level. Should it hold, that’s where I would buy.
Below that, the 50-day moving average should act as support too. If that level gives way, investors could use a stop-loss below the 50-day, or just below $175, which has been so-so support over the past few months. The trade is simple: Buy NFLX stock assuming it pulls back and holds $190.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
