Netflix, Inc.: Why NFLX Price Hike Blows Analyst Estimates Away

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Netflix, Inc. (NFLX): It’s one of those high-flying names that swing traders love and value investors hate. Growth managers were practically out of a job in 2015 if they didn’t have NFLX stock in their portfolio.
But frankly, analysts aren’t usually known to be conservative with high-flying stocks like Netflix. Year after year of mind-numbing revenue growth tends to attract analyst attention, and that’s precisely what Netflix has been doing.

Longtime shareholders have been amply rewarded, especially those prescient few who bought in the dark days of 2012.

At the time, the company was recovering from a severe image hit courtesy of the Qwikster debacle. If you don’t remember Qwikster, it was the name that Netflix gave its DVD-by-mail business when it tried to spin that off into its own thing.

It didn’t work, and NFLX stock would go on to fall from a split-adjusted $42 per share to $8 per share in a year. Since then, it’s been nothing but green grass and blue skies.

NFLX Stock Today: Is Price Hike Factored in?

Today, analysts are pretty bullish on the streaming video leader. Of the 41 brokers who’ve weighed in, the mean price target for NFLX stock is $123.32, and the median is $130.

Shares closed at $102.68 yesterday, so those targets imply some solid gains to be had.

If you’re looking for a mathematical explanation of why those targets are too low, you won’t find it here. Personally, I find NFLX stock awfully difficult to price using quantitative models, and I feel like projecting out to 2019 or 2020 in order to justify today’s valuation is more than a little speculative.

What I can do, though, is look at what analysts have already projected, in the short-term, and add my input. After looking over the expectations for the next few quarters, I can say that I think NFLX will beat the Street — particularly in Q2.

That’s largely because of a looming price hike that’s about to impact tens of millions of Netflix customers. Next month, everyone who signed up for Netflix’s most popular monthly subscription — it lets you watch on two screens simultaneously and has HD capabilities — before May 2014 will be bumped up from $7.99 per month to $9.99 per month. New subscribers are already paying $9.99 per month, and some who signed up after May 2014 are paying $8.99.

Let’s keep it simple though. The question is: How many people will be bumped up from $7.99 to $9.99 in May, how many will cancel because of that and what’s the net effect on NFLX revenues as a result?

UBS thinks the extra $2 monthly fee will hit 17 million people who will be “un-grandfathered” from that $7.99 rate. That could be true, although at the end of Q2 2014 — as close to May 2014 as the financials get us — Netflix had 48 million paid members across the globe. It seems likely to me that far more than 17 million of those were using its most popular streaming option.

Lets say that just 23 million people — less than half — of Netflix subscribers were using the “standard” subscription at the time. Personally, I feel like this is the conservative number, and the 17 million figure is simply absurdly low.

Here’s the boost it’ll give Netflix revenue: 23 million (number of subscribers) x $2 (incremental revenue) x 2 (number of months in effect; May and June) = $92 million. That’s the incremental revenue NFLX will see in Q2. In Q3, because all three months will benefit instead of just two, it’ll be $138 million.

Fun fact: Netflix won’t have to do anything differently for this incremental revenue boost, so that $92 million should go straight to the bottom line. Seeing as the company posted net income of only $43 million in Q4, that’s a major boost.

NFLX has been growing quarter-over-quarter revenue between 4.55% and 5.95% for the last year. Q1 revenues are expected to come in at $1.97 billion. Again, if we use some conservative arithmetic and assume Q2 over Q1 revenues will show a 4.55% improvement, we get $2.06 billion.

But that’s just organic growth. We’ve yet to add in the $92 million from the $2 price hike, which brings us to $2.15 billion, a good $30 million better than the $2.12 billion expected by the Street.

That might not sound like an incredible difference, but remember, we used conservative inputs, and especially considering the international expansion efforts that weren’t in effect last year, the quarter-over-quarter growth expectation of 4.55% is especially conservative.

At the end of the day, no one really knows how to pin an exact value on the NFLX stock price. But beating earnings and revenue expectations is a good place to start, and come May, Netflix will probably have an extra $120 million per quarter coming its way from price hikes alone.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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