The Street Breaks Down What's Next For Netflix After Price Hike

Netflix, Inc. NFLX customers will be paying as much as 18 percent more for their streaming video subscription and Street analysts were mostly optimistic on the move.

What Benefit Will It Bring?

Netflix's announced a price increase of 13 percent to 18 percent depending on the subscription model and could result in an incremental $400 million in revenue this year, Buckingham Research Group's Matthew Harrigan said in a note. The company likely believes it can command a higher price given an improvement in content quality and higher viewing hours.

Netflix has two options for its extra cash, including lowering its overall cash flow burn which is still projected to be $3.3 billion in 2019. Instead, the company can add the extra $400 million to finance even more programming.

Netflix has a path towards increasing its annual price by as much 4.4-percent per year through 2025, which Harrigan said would value the stock at $443 per share. A more conservative baseline 3.5 percent annual price increase is used to generate the current price target of $382, which the research firm continues to monitor as it implies just 8-percent upside.

Tigress: Downside To Low $200s Per Share Likely

Netflix's price increase comes at a time of heavy investment in original programming at the expense of rising debt levels, Tigress Financial Partners' Ivan Feinseth
said in his daily newsletter. The company most recently issued $2 billion of bonds in October and now carries $14 billion worth of outstanding debt.

Meanwhile, Netflix is losing some of its competitive advantages against rivals like AT&T Inc. T and Walt Disney Co DIS who own their own studies and backed by other revenue streams to showcase its content. Netflix will likely find it difficult to compete against newcomer Disney after losing access to Disney's library.

Investors are recommended to be sellers of Netflix's stock at current levels as it has a path towards the mid-to-low $200 per share level.

'Simplest Thing To Model'

Netflix's revenue is the "simplest thing in the world" to model as it based on total subscribers multiplied by average revenue per user, Bernstein's Todd Juenger said in a note. The company's recent price increase announcement is simply a "broad-based and significant increase" to ARPU and implies not only revenue growth but also that subscriber trends "must be strong" for the company to have the necessarily confidence to boost prices.

It's also possible Netflix is seeing its subscriber trends stalling so it is "entering harvest mode" to help lift total revenue, the analyst said.

Price Action

Netflix traded at $352.57 per share Wednesday afternoon.

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