Not even two years have passed since then Netflix‘S (NASDAQ: NFLX) latest price increase and analysts are already asking for another.
JefferiesAlex Giaimo said Monday morning that he thinks a price hike is likely in the short to medium term, expecting a $ 1 or $ 2 rise over the next year. The move would come after Netflix raised prices on most US subscribers from $ 11 / month to $ 13 / month last year alone, an actual increase of 18%.
Because a price increase may be on the way
After the Qwikster debacle nearly a decade ago, Netflix had been reluctant to raise prices, but that approach may change, especially after its aggressive price hike last year. Management believes that as the company adds more content, the service becomes more valuable to subscribers and therefore it is appropriate to charge more.
COO Greg Peters explained during the recent earnings call: “And it’s not so much some sort of priority plan that we have, but really more by using those signs that we’ve done a good job of creating more value for our members, which indicate us. , hey, it might be time to go back to them and ask them a little more so that we can invest further in great stories, great content, better product experiences and create even more value for them. “
As a pure streamer, Netflix’s content budget ultimately comes directly from subscribers. The company believes that more content increases its subscriber base, so there’s a flywheel effect between rising prices, adding content, and growing its user base. As long as Netflix prices are below the supply / demand balance point, it makes sense to raise them, both to increase profits and to increase your content budget.
When Netflix hiked prices early last year, it saw an increase in abandonment in the second quarter, the period after the price hike. It added just 2.7 million subscribers globally, compared to its forecast of 5 million, and its domestic subscribers dropped by 130,000, the first decline since the Qwikster era, although the second quarter is a seasonally slow period. In its letter to shareholders, the company acknowledged: “Our missed forecast affected all regions, but slightly more in regions with price increases.”
Even though Netflix has lost some US subscribers, the value of those subscribers has nonetheless increased substantially as prices rise. Home streaming revenue increased 21.4%, even though the company’s subscriber base only increased 7.4% year-over-year. While Netflix has to be careful not to overwhelm its subscribers, it’s easy to see from those numbers above how the company benefits from a price hike, as nearly all of these additional fees come to the bottom line.
In 2020, the pandemic drove millions of Netflix subscribers forward. During the first half of the year, the company added nearly 26 million divers worldwide, nearly as many as it added in all last year. If subscriber growth was anticipated, it makes sense that price hikes would also have come sooner than they would otherwise.
What it means for investors
If Netflix aired a $ 1 / month price increase for most of its subscribers, it would raise prices for the average subscriber from $ 10.90 / month to $ 11.90, or 9.2%. While another price hike might cause some abandonment, it almost certainly wouldn’t take 9% of subtitles off the platform, especially considering Netflix would be even cheaper than HBO Max.
That additional $ 1 / month price hike would result in nearly $ 2.4 billion in incremental annual revenue – assuming there is no impact on the dropout rate – which would go directly to the end result, or could be used to increase. the company’s content budget or avoid taking on additional debt. The streaming company also said it intends to increase its operating margin every year, going from 16% this year to 19% next year, which would be helped by a price hike.
Netflix shares moved with the market on Monday, as talking about a price hike was just speculation by a single analyst, but investors (and customers) shouldn’t be surprised to see one next year. With its vast library and growing subscriber base, the company has earned it and will benefit its stakeholders in the long run.