Netflix just announced another $1 increase in its monthly subscription price, and Wall Street lauded that decision by sending shares higher on Thursday, although the stock has reversed course today. Netflix even earned at least one price target increase by upping its monthly price.
Netflix price target to $140
Pacific Crest Securities analysts Andy Hargreaves and Evan Wingren reiterated their Overweight rating and upped their price target for Netflix from $122 to $140 per share. They believe the increase suggests that the streaming video provider is confident in its subscriber growth. They also say the increase suggests that Netflix is going to raise prices more quickly than they had previously been modeling.
The company upped its two-stream plan another dollar in the U.S., Canada and some Latin American countries, bringing the plan to $9.99 per month. This is the second time Netflix has raised pricing on the plan since the beginning of last year.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Netflix looks confident
The Pacific Crest team is projecting a terminal price of $12 in the U.S., but now they think that’s looking “very conservative.” They also see Netflix as providing a higher value in terms of its offerings compared to HBO, Showtime and Hulu Plus, which in turn gives it more pricing power.
The analysts also think Netflix is demonstrating confidence in its home market, noting that management probably still remembers Qwikster and probably wouldn’t increase prices if they were worried about subscriber growth trends. As a result, they see the price increase as being a “positive indicator” of stability in the company’s current North American user base and also for growth going forward.
Netflix riding the wave of Internet TV
It’s clear that the TV industry as a whole is going through some much-needed changes as consumers make clear their distaste for traditional TV and, in particular, bundling. Netflix is a clear beneficiary from this transformation, as demonstrated by its ability to raise its price without a significant impact on subscriber growth.
Also Netflix’s large scale places it ahead of competitors in the space. Subscribers are now spending about two hours per day on the service, which Hargreaves and Wingren believe suggests “latent pricing leverage.”
Analysts at Pacific Crest Securities initiated coverage of several major media companies this week, taking the angle of Internet TV and how it’s impacting traditional pay-TV. They’re rather bearish on most of the industry, including Comcast, DISH Network, Time Warner Cable, AT&T, Verizon and CBS.
Why Internet TV is better than traditional TV
They think Internet TV offers better personalization options, more flexibility, and the ability to develop products, which they think is the most underestimated part of their thesis. They expect the shift toward Internet TV to speed up and “Internet economics” to “infect the traditional pay-TV industry.” Currently streaming video on demand makes up only a very small portion of the annual revenue opportunity in the video ecosystem, but that’s expected to change.
Hargreaves and Wingren add that currently Netflix pays about 9 cents per hour viewed, a metric that’s falling, verses traditional TV networks that pay about 23 cents per hour viewed.
They noted that already some of the secular changes that have been made are affecting the business models of some companies, and while pay-TV may currently enjoy high margins, they expect the companies’ profits to shrink and shift over to streaming video providers.
One of the main reasons Pacific Crest sees Netflix as being so well-positioned in the industry is because they expect the distribution of video content to be “highly profitable” and “extremely concentrated.” In addition to Netflix, they also like Google and Apple in the area of distribution.
Customers hate pay-TV
Consumers clearly hate pay-TV, as demonstrated by numerous consumer satisfaction surveys, according to Pacific Crest. Subscriber levels remain almost flat and consumers are adding on streaming video services but keeping their pay-TV services even though they hate pay-TV. The analysts also say average revenue per use has climbed 20% in the last five years and pay-TV companies have increased their ad loads to increase revenue.
One of the things consumers complain about with pay-TV is the bundling of services they don’t want in with the ones they do. The Pacific Crest team argues that bundling isn’t really bad, however, because it increases variety and “consumer surplus” while also raising industry profits.
They say the big problem is the “tightly controlled nature” of the industry, and this has resulted in what they call “tying” instead of bundling, which involves tied components. They think the components that have become tied will probably come unwound, including hardware, shows and networks.
Also they say the rising costs of sports programing suggests that it won’t be included in pay-TV bundles much longer.
All graphs/ charts in this article are courtesy Pacific Crest Securities.