Netflix, Inc. (NFLX), the ambitious leader in streaming video, is raising monthly subscription prices for its standard plan from $8.99 to $9.99 for new subscribers, according to a Bloomberg report this afternoon.
NFLX stock, which was down more than 5% at one point on Thursday, instantly shot higher and was sitting on gains of more than 2% in the minutes after the news broke.
In one sense, it makes an awful lot of sense for the stock to react positively to the news. By now, Netflix has enormous name recognition and a reputation for developing some high-quality original programming. Netflix was nominated for 34 Emmys this year, nearly triple the 12 noms rival Amazon (AMZN) picked up.
In other words, it’s got quality content that customers should be willing to pay $9.99 per month to enjoy.
Plus, NFLX is adding subscribers at a blistering pace, so boosting prices is just another tool to boost revenues.
But in another sense, today’s NFLX stock spike was entirely irrational. All that content costs a pretty penny, after all, and despite its rapid revenue growth, Netflix is still not too profitable in relation to its out-of-control valuation on Wall Street.
The Details of the Netflix Price Hike
Bloomberg reports that NFLX will be:
“…raising the price of its most popular streaming subscription by $1 a month to $9.99 for new customers in the U.S., Canada and parts of Latin America.”
Specifically, the $9.99 monthly subscription price will be for its most popular offering, which allows users to watch two simultaneous streams from the same login and supports HD viewing.
I’ll get to why I think the jump in NFLX stock was entirely unwarranted in a second, but first, let’s look into the rationale behind the hike, which Netflix provided to Business Insider:
“To continue adding more TV shows and movies including many Netflix original titles, we are modestly raising the price for some new members in the U.S., Canada and Latin America. As a thank you to existing Netflix members — who aren’t already benefiting from a previous price guarantee — we will maintain their current price for a year.”
Pretty straightforward. The company definitely needs to find a way to finance its soaring content costs, which will total $4.3 billion over the next year. Content costs are the main culprit keeping the company’s profits so miniscule in relation to the NFLX stock price.
NFLX stock trades at more than 300 times forward earnings — a multiple reminiscent of a tech company at the height of the dot-com bubble. Netflix shares have melted 133% higher in 2015 alone as Wall Street gushes over the company’s subscriber growth numbers. With a global expansion plan that should be completed by the end of 2016, more subscriber growth is sure to come.
This, however, doesn’t solve Netflix’s core problem: Soaring content costs, sparked by competition from AMZN, Hulu and HBO, as well as more traditional, cable-based broadcasters.
I concede that the $1 price hike is a net positive for NFLX stock and probably necessary. But going above that $9.99 level, I think, will be much more difficult, if only because consumers don’t like seeing more digits in their pricing plans.
At the end of the day, NFLX stock was already massively overvalued before the announcement, climbing on momentum and buzz instead of realistic earnings projections.
All today’s jump did was make the stock more expensive — and the eventual selloff more severe when investors are finally confronted with reality.
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 firstname.lastname@example.org.