Netflix Analysts React to U.S. Price Increase

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Some on Wall Street raised their stock price targets, but one analyst says: "Yes, it adds $60 million a month to revenue, but if they lose a few million subscribers and grow more slowly, their multiple will compress."

Wall Street analysts late in the week updated their financial models for Netflix for the streaming giant's U.S. price increase, unveiled on Thursday.

Many on the Street have long predicted a hike in the monthly cost of the streaming service in its home market, but most had forecast it for 2021.

Netflix chief operating officer and chief product officer Greg Peters had said on the company’s third-quarter earnings conference call last week: "You heard from [co-CEO and chief creative officer] Ted [Sarandos] the number of original productions we're doing, increasing even under these conditions ... If we do that, we feel like there is that opportunity to occasionally go back and ask for members where we've delivered that extra value in those countries to pay a little bit more."

In a sign that investors see the price increase helping the streamer’s financials, Netflix’s stock rose Thursday afternoon. But it was down in early Friday trading amid a broader market drop. As of 11:30 a.m. ET, the stock was down 5.2 percent at $477.91.

Analysts in their reactions to the news said the price hike would boost revenue and average revenue per user in the more mature U.S. market.

"Even at the new price point Netflix is still an incredibly inexpensive entertainment experience, especially compared to pay TV," Pivotal Research Group analyst Jeff Wlodarczak tells THR. "As usual, they did not raise their one stream price, which gives the more economically disadvantaged an option. What it also does is better monetize the 16 million-plus households that pirate (password share) the service."

Like others, he was most surprised about the timing of the price increase. "It came a little earlier than I thought, but historically they have raised every two years," the analyst said.

Guggenheim Securities analyst Michael Morris raised his revenue estimates and stock price target for Netflix by $25 to $595. "We believe the announced increase was included in management guidance for the fourth quarter and note that our revised estimates remain generally in-line with that guide," he wrote in a Friday report.

"Our prior forecast assumed periodic price increases averaging about 5 percent annually, though timing of specific changes can surprise," he continued. "We previously had forecast a domestic price increase in the first half of 2021 rather than in the fourth quarter of 2020."

Piper Sandler's Yung Kim, who has an "overweight" rating on Netflix's stock, also raised his price target to $643 from $630 after the price increase.

Meanshwile, Evercore ISI’s Lee Horowitz maintained his "in line" rating on the stock with a $425 target price. "We had expected this news and had already been modeling in a U.S. price increase though the details are slightly different than our prior assumptions," he said. "We had been modeling in a $0.50 increase in basic pricing and a $1.50 increase in premium pricing."

He also argued that the stock shouldn't gain on the news. "With shares trading up around 5 percent on this news, we believe the strength is unwarranted, particularly after the company announced an almost identical price increase in Canada earlier this month, suggesting the U.S. increase was likely already included in most investors’ expectations around the 2021 revenue outlook," the analyst explained.

But Wedbush Securities analyst Michael Pachter remains bearish. "It looks to me like they risk having domestic subscribers decline this quarter," he tells THR. "I think it is a foolish move, investors think it's bold." And he adds: "Yes, it adds $60 million a month to revenue, but if they lose a few million subscribers and grow more slowly, their [stock price] multiple will compress."