From Bearish To Bullish: Buckingham Upgrades Netflix

The bullish case for Netflix, Inc. NFLX can now be made solely on a revision of the company's pricing power and overshadows expectations for continued cash burn through 2022, according to Buckingham.

The Analyst

Buckingham Research Group's Matthew Harrigan upgraded Netflix from Underperform to Buy with a price target lifted from $349 to $406.

The Thesis

Buckingham's deep dive into Netflix's pricing suggests the company could "plausibly deliver" a 5.1-percent annual price increase to members through 2025, Harrigan said in a note. Even using a more conservative 3.4-percent price increase, the case for 31-percent upside to the stock can be made. The pricing forecast marks an increase from the analyst's prior estimates of a 2.5 percent compounded annual growth price increase through 2025.

Harrigan said there are two reasons to justify price increases.

• At current rates Netflix subscribers are paying only 22 cents per hour of viewing on average, but this rate can be justifiably moved higher. Netflix continues to release a broader range of content to better target more viewers across all demographics, such as "Stranger Things" and "The Crown." New releases for the teen market include "The Chilling Adventures of Sabrina" and the reboot of "Carmen Sandiego" is targeted towards children.
• High-end "Ultra" 4K packages (and 8K over time) could appeal high end consumers at a better-than-expected rate. The company is testing a Euro 19.99 a month version in Europe that offers high dynamic range content. Ultra penetration could be priced at a 21 percent price point premium and boast a 55 percent penetration rate by 2025.

The two pricing catalysts outweigh the negatives and implies the bearish case for Netflix's stock is no longer be justified.

Price Action

Shares of Netflix were trading higher by 2 percent to $315.50 Monday afternoon.

Related Links:

The Street Reacts To Netflix's Q3

KeyBanc Downgrades Netflix, Cites A Need For Stronger Revenue Growth