Netflix, Inc.: NFLX Stock Isn’t the Falling Knife You Think It Is

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The nation’s favorite video streaming service finally seems to have hit a few roadblocks. Netflix, Inc. (NFLX) fell another 3% on Tuesday after falling roughly 20% so far this year, pushing share prices below both their 50- and 200-day moving averages.

Netflix, Inc.: NFLX Stock Isn't the Falling Knife You Think It Is

Concerned about management’s decision to hike the cost of a subscription by $2, the bears have been avoiding NFLX stock like the plague — but I think anyone who isn’t buying this stock at these prices is missing out big time.

Analysts who are overly concerned about NFLX losing subscribers misunderstand the emerging exclusive content model. This company isn’t a broadcast channel, where everything depends on the viewership numbers you can give advertisers.

Wall Street Is Wrong About NFLX

Wall Street needs to think of this company as the next incarnation of HBO, where people are more than willing to pay a recurring subscription to access exclusive programming as well as second-run movies and shows.

That exclusivity allows companies like Netflix to charge fewer people more money for the service simply because they’re invested in the programming.

The math is really simple: If you charge your existing customers 20% more, you can afford to lose 20% of them and still make the same amount of money. For NFLX, with its 27 million subscribers, that means the breakeven point is around five million people.

If more than five million subscribers drop the service, the price hike was a failure. But if fewer drop, the price hike did its job squeezing more money from an incrementally smaller audience.

It seems counterintuitive to those used to the idea that bigger is better in any audience-driven business like broadcast TV. If this were a price-sensitive audience, the hike would have been a bigger risk because value-driven consumers would gravitate toward cheaper alternatives to get their fix.

But as it is, those same consumers are already watching videos on YouTube and Hulu for free anyway, so the cost of a Netflix subscription doesn’t really matter — the company is not going to get that crowd.

“Game of Thrones” is the gold standard in this business model, and a perfect example of what NFLX wants to achieve. That show alone is probably the top reason HBO maintains 46 million cable subscribers (at $10 a month) and one million new streaming-only HBO Now accounts (at $15 a month).

Netflix’s original series are largely niche hits at best, but adding more high-quality content is all they need to draw more subscribers into its walled garden.

Analysts speculate that NFLX could lose about 500,000 subscribers due to the new price point. That’s well within the five million comfort zone I mentioned before — in fact, at less than 2% of the current audience, that’s more or less a normal turnover rate. In the meantime, the company is going to make a lot of money on the 98% of the audience it keeps.

It’s also important to note that NFLX stock isn’t positioned for hyper growth anymore, so management’s business decisions have shifted from “How do we acquire a bigger audience?” to “How do we monetize the audience we have?” This price hike is one-step toward that goal.

The caliber of Netflix’s shows like “House of Cards” means that once people start watching, they’re hooked in. Most of those subscribers aren’t going to go away over $2 a month, which is why I think this stock is such a steal while it’s still depressed from analyst backlash.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/netflix-inc-nflx-stock-isnt-falling-knife/.

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