Netflix's Biggest Near-Term Problem Could Be 'Un-Grandfathering'

May will mark a significant change for some dedicated Netflix, Inc. NFLX users who have previously been protected under "grandfathering" policies.

The "un-grandfathering" event is slated to happen in May, and according to some analysts, is expected to impact 70 percent of state-side subscribers.

The process will bring users previously covered by a limited-time grandfather clause into the newest pricing. Last October's rate increase bumped the monthly subscription price from $7.99 to $9.99, but only applied to new subscribers for a limited time. Netflix did make it known that the discount would be short-lived, and eventually all users would be required to pay the $2 increase.

How Big Is The Concern?

Needham analysts Laura Martin and Dan Medina are calling the event one of, if not the, biggest near-term obstacle ahead for Netflix.

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"NFLX said that grandfathering of lower monthly fees for 2-stream subscribers will largely end over the next three to four months in the US as the 2-stream service moves up to an ASP of $9.99/month," the analysts began.

"This may work against the net-added subscriber numbers over the next one to three quarters, which is the cornerstone of NFLX's share price."

Ratings, Price Target And Justification

The firm maintains its Buy rating on the stock, but lowered its 12-month price target from $125 to $115, and highlighted a few risks that could influence that pricing.

"Risks to our NFLX target price include rising content license fees, falling content availability, slowing global subscriber growth, FX headwinds, and lower viewing/ratings for NFLX's original programming."

However, the analysts concluded, "We believe that Netflix is the best way to participate in the global growth of broadband penetration. We believe that the breakeven on international subs is two to three times faster than US subscribers, and that NFLX's international subscribers should be valued based on their lifetime value, not their near-term losses reported in the P&L. Rising investment in original programming lowers NFLX's exposure to rising content costs."

At time of writing, Netflix was down about 11 percent at $96.59.