Netflix Inc. quietly hiked the cost of two of its subscription tiers slightly on Thursday. Shares rose 5% during intraday trade following the news and hit an intraday high during trading Friday morning, suggesting investors approve of the increase.
Analysts following the streaming giant were, for the most part, optimistic following the price increase. The standard subscription went up to $10.99 a month from $9.99, and the premium-tier subscription rose to $13.99 from $11.99.
Analysts at Oppenheimer, KeyBanc Capital Markets, Wedbush and Jeffries increased their 12-month price targets for Netflix
The timing for the price hike couldn’t have been much better, according to Raymond James analyst Justin Patterson. The price increase, immediately affecting new members, comes ahead of the Oct. 27 release of season two of “Stranger Things.” The fantasy thriller was a surprise hit for the streamer last year.
Netflix doesn’t typically offer insight into the success or failure of its programming, but management has pointed to “Stranger Things” as a catalyst for subscriber growth.
“Our first take was that Netflix had a strong Q3 and determined Q4 was a good time to increase pricing… We believe that positioning the price increase in front of ‘Stranger Things’ likely mitigates churn,” Patterson wrote in a note to investors. “However, we believe the other view must also be weighed — did something change to force Netflix to play defense?”
“Media companies becoming more stringent on where content is licensed and rising content costs in the peak TV era could also explain the price increase. We expect to learn more on the company’s Q3 2017 earnings call,” he added.
Patterson maintained his outperform rating on Netflix and his $205 12-month price target.
Netflix chief content officer Ted Sarandos said recently Netflix will likely increase its content spend to $7 billion next year, up from $6 billion this year and $5 billion in 2016.
The company has not been shy about needing increasingly more cash to fund its content goals and continue to drive growth.
‘Netflix is destined to be a cash-burning, high-growth company until it changes its strategy and accepts its fate as a highly profitable slow-growth company.’
Wedbush’s Michael Pachter, who is bearish on Netflix, said he doesn’t expect the hike to push subscribers away, but thinks attracting new subscribers will be more difficult and expects net adds to be down year-over-year in 2018.
Pachter rates Netflix at underperform, but raised his 12-month price target to $88 from $82.
“Notwithstanding its domestic price increase, we expect Netflix to burn cash to fund content acquisition for many years,” he wrote. “We think that Netflix is destined to be a cash-burning, high-growth company until it changes its strategy and accepts its fate as a highly profitable slow-growth company. When it does so, we expect its shares to reach our price target.”
Analysts at Jefferies expect the price increase to drive a mid- to high single digit percent impact on domestic revenue, but said content investment could offset whatever benefit to overall profitability.
“Assuming no churn, we estimate that a $1 to $2 increase could drive about $650 million to $700 million in incremental revenue in 2018,” lead analyst John Janedis wrote in a note to clients. “Upside could be driven by tier downgrades vs. cancellations, and incremental subscriber growth related to promotions.”
Janedis maintains a hold rating on Netflix, but raised his price target to $180 from $165.
KeyBanc analyst Andy Hargreaves, who rates Netflix at overweight, wrote that the benefit of increasing prices will outweigh a small hit to subscriber growth. Hargreaves bumped up his price target to $206 from $190.
Shares of Netflix have gained 59% in the year to date, while the S&P 500 index
is up nearly 14% and the Dow Jones Industrial Average
is up more than 15% during the same period.