Netflix Flexes Its Pricing Power

Shares of Netflix, Inc. NFLX gained more than 5 percent on Thursday and hit a new all-time high of $194.49 as investors reacted favorably to the company's announcement of a price hike for U.S. consumers.

The cost for Netflix's high-end plan, which allows users to stream on four devices in high definition, will rise from $11.99 to $13.99, the mid-range plan will increase from $9.99 to $10.99 and the basic plan will remain unchanged at $7.99.

One of the main takeaways from the announcement is that Netflix will likely follow up with a similar increase in many of its international markets, Rosenblatt Securities' Alan Gould commented in a research report. As such, Netflix is expected to see an uptick in its average revenue per user although not by the full amount as some will choose to downgrade their subscription package.

Accordingly, Gould maintains a Buy rating on Netflix's stock but with a price target raised from $200 to $225 to account for an incremental $300 million in 2018 and assumptions for another price increase in October 2018.

Netflix could have a reason for increasing its cost as the streaming video provider is projected to spend $15 billion per year on content in four years and then $25 billion annually in eight years, the analyst suggested. While this may seem like a large number of investors should consider that Netflix boasts the largest global subscriber base, which implies it is also the lowest cost provider on a per subscriber basis with minimal distribution costs.

UBS: Good Timing

Netflix's confirmation of a price increase coincides with what should be a "strong" fourth-quarter content slate, which will help minimize churn, UBS's Doug Mitchelson commented in a research report.

Moreover, Netflix's decision to boost its prices could be seen as a sign of strong consumer base as it would have likely passed on such a move if subscriber trends "were disappointing," the analyst commented. This should in turn boost investor confidence in the stock.

In fact, Netflix has been active in raising its prices in other international markets throughout 2017, including Brazil, Australia and Canada and any negative impact in these regions to a price increase hasn't been noticeable, Mitchelson added.

Finally, Netflix's 2016 price increase of $2 per month did generate "noticeable" churn but was still modest versus the size of the price increase. The company also learned from this price increase how to better manage future price changes moving forward.

Mitchelson maintains a Buy rating on Netflix's stock with a price target with an unchanged $225 price target.

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