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Wall Street Is Mostly Positive On Netflix's Price Hike

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Wall Street Is Mostly Positive On Netflix's Price Hike

Netflix, Inc. (NASDAQ: NFLX) announced last week it will be boosting the monthly cost for consumers to use its service for its high-end and medium-end packages. The report was for the most part well received by Wall Street analysts, some of which revised their bullish stance upward.

Oppenheimer: Increased Profitability

Oppenheimer's Jason Helfstein maintains an Outperform rating on Netflix's stock with a price target boosted from $200 to $215 (see Helfstein's track record here).

Netflix's price increase will likely result in a 10 percent rise to its average selling price, which in turn will result in a 4 percent incremental boost to its 2018 and 2019 revenue, Helfstein commented in a research report. Including the impact of expected churn from the price hike, the analyst is now modeling an incremental $289 million in US streaming subscriber revenue over prior estimates.

However, the corresponding boost in earnings will be used by the company to fund international content and gain new subscribers. Specifically, the analyst's 2018 and 2019 domestic EBIT estimates were raised by 7 percent and 6 percent, respectively, but were offset by $145 million and $150 million reductions to international EBIT.

UBS: Right Timing

UBS's Doug Mitchelson maintains a Buy rating on Netflix's stock with an unchanged $225 price target (see Mitchelson's track record here).

The timing of Netflix's price increase coincides with what is considered to be a "strong" slate of content for the fourth quarter which will eliminate churn, Mitchelson commented in a research report. In fact, Netflix's management team likely wouldn't implement a price increase if it wasn't confident enough in its content. In turn, this should bolster investor confidence in the company's outlook.

Netflix has been active in raising its prices throughout 2017 and did so in Brazil, Australia and Canada, the analyst continued. This has been done with no observable negative impact on subscriber numbers and there is little reason to suspect that a price increase in the U.S. will be any different.

Related Link: Netflix Makes A New All-Time High By A Wide Margin

Finally, Netflix's largest price increase took place in the second and third quarter of 2016 when most customers saw a $2 per month increase. The overall churn from this move was "noticeable but still modest" compared to Netflix's overall size. As such, the company has gained some valuable experience to help manage price increase implementations, such as the one announced last week.

Elsewhere On The Street

The Buckingham Research's Matthew Harrigan maintains a Buy rating and $214 price target on Netflix's stock (see Harrigan's track record here).

Netflix's price increase to its service could be seen as validation of its consumer viewing traction and success of its original content, the analyst argued. In fact, a best-case scenario would value Netflix's stock as high as $308 but this may take time as the company will generate $6.3 billion in cumulative free cash flow deficits through 2020 before free cash flow positive in 2021.

Rosenblatt Securities' Alan Gould maintains a Buy rating on Netflix's stock with a price target raised from $200 to $225 (see Gould's track record here).

Key to Netflix's success is understanding that while the price increase could be seen as means to better manage content spend it is one of the cheapest content makers, the analyst argued. Specifically, Netflix is projected to spend $15 billion per year on content in four years and $25 billion annually in eight years but allocating this amount over its large global user base implies it is the lowest cost provider with minimal distribution costs.

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Latest Ratings for NFLX

DateFirmActionFromTo
Aug 2019MaintainsOutperform
Jul 2019MaintainsBuy
Jul 2019ReiteratesOutperform

View More Analyst Ratings for NFLX
View the Latest Analyst Ratings

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