The Netflix Price Increase: What It Means For Shareholders

Buckingham Research in a note Friday looked into the implications of the hikes for shareholders. The firm said the hikes are in line with its view that higher original programming spend should be supported by better price segmentation as well as volume growth.

As such, the firm reiterated its Buy rating and $214 price target for the shares, which implies a 10-percent upside from current levels.

Justification For Continued Bullishness

Analyst Matthew Harrigan clarified that he is not making changes to his S&P 500-linked price target until after the fiscal-year, third-quarter earnings due on Oct. 16.

That said, the analyst estimates the hikes, before any induced member churn, discounting, to equate to a 9-percent average U.S. price increase, assuming basic membership accounts for 30 percent of the total; standard, 45 percent; premium, 25 percent.

Buckingham Research sees this to translate to incremental sales of $257 million, relative to its current forecast. On applying the new estimates, the firm said the 2018 price target would have moved up to $217.

For now, the firm said it is adhering to its original $214 price target, as it believes a one-year increase is manifestly not a game changer. However, the firm said it is encouraged by the apparent pricing power confidence, which is amplified by comScore viewing momentum and continued critical programming success (see Harrigan's track record here).

Why Hike The Price?

The firm sees the price hike as a result of continued consumer viewing traction and critical original content success. Pointing to comScore's studies, the firm said an average U.S. Wi-Fi home streams an average of one hour and 40 minutes of Netflix content to TVs daily, with Netflix accounting for 40 percent of the over the top hours compared to 39 percent for the Amazon.com, Inc. AMZN Video, Hulu and Alphabet Inc GOOGL GOOG's YouTube combined.

The firm expects Netflix to generate $6.3 billion in cumulative free cash flow deficits from 2017 to 2020 before tentatively moving to free cash flow positive in 2021. Meanwhile, the firm sees competition from OTT streaming entrants with distinctive original programming, versus me-too "skinny bundles."

"Netflix is a major disruptor within the global TV ecosystem, and it should command ample long-term network effects even if not as overwhelming as those for FANG brethren Amazon and Google," the firm said.

Buckingham Research's best- and worst-case scenarios price targets are $308 and $140, respectively.