How Much Will Subscription Rate Hikes Help Netflix?
Netflix’s (NASDAQ: NFLX) subscription prices are set to increase in December. While the standard U.S. subscriptions will jump from $9.99 to $10.99, the premium tier pricing will increase even more, from $11.99 to $13.99.
The company raised prices last year as well without much customer backlash. This indicates that its content, both original and licensed, has been well-received by its subscribers. To ensure that it continues to retain and attract new subscribers, it needs to keep adding more content – especially original content – to its library. However, the upfront cost to develop new original content is high. While the company has a planned investment outlay of over $7 billion for content in 2018, and will likely maintain or increase those levels going forward, its current cash flows cannot support this level of spending. By increasing subscription prices, Netflix can fund a portion of these content expenses. In this note, we explore the impact these rate increases may have for the company.
How Much Will Rate Hikes Help?
- Up 27% Year To Date, Will Q1 Results Drive Netflix Stock Higher?
- Netflix On A Roll As It Benefits From Paid Sharing And Ads. Is The Stock Undervalued At $610?
- Up 50% Over Last Year, Will Q4 Earnings Drive Netflix Stock Higher?
- Will Netflix Stock Rally 40% To Return To Pre-Inflation Shock Highs?
- How Will The Password Sharing Crackdown Help Netflix Q3 Results?
- Will Netflix Stock Return To Pre-Inflation Shock Highs Of Over $650?
Netflix is expected to exit 2017 with 110 million paying streaming customers across the U.S. and international markets. While the company initially plans to raise prices only for U.S. subscribers, we expect that it will eventually increase subscription prices for international customers as well. We have assumed two cases to evaluate the impact of price hikes on the company’s financials:
- Base case: If we conservatively assume that prices increase for only U.S. customers, at an average of $1 per customer per month, then the company can add over $600 million in additional revenues from its existing subscriber base. However, if prices for international customers were to increased by a similar amount, then the company could add around $1.3 billion in revenues.
- Bull case: We project that Netflix will have close to 130 million total subscribers by the end of 2018, with nearly 60 million in the U.S. If we were to consider the median projected subscriber base in the U.S. for 2018 with an average increase in prices of $1.50, the company could generate $1 billion in additional revenues. Expanding this case to consider rate hikes for international users could yield the company as much as $2 billion.
These potential incremental revenues could help the company cover as much as 25% of its content budget, depending on the scope of the price increases. The remainder of the content budget overhang will likely be financed through debt.
At present, we have a price estimate of $181 per share for Netflix, which is slightly below its current market price.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap