Netflix (NASDAQ:NFLX) bears have been harping relentlessly about the way NFLX stock has continued running riot even on the back of not-so-great news. The latest price hike by the company is a good case in point. Under ordinary circumstances, the latest price hike by the streaming giant should at least have slowed down the red-hot stock some. After all, history proves that NFLX subscriber growth does slow down following price hikes. Instead, NFLX stock has frequently been taking out new highs, and is currently sitting just below its all-time high watermark.
NFLX stock obviously does not fit into the classic four-walled paradigm of your average growth company, and maybe the sooner the bears acknowledge this the better. Nevertheless, the bears might finally have a narrow window to pounce. A sale signal developed from a pivot top point a couple of days ago, and a break below the $189.29 support could trigger a substantial correction.
Grumpy NFLX Customers
The fundamentals are not on the side of the bears, though. The positive reaction by NFLX stock is a clear vote of confidence by investors that the price hikes will not trigger a mass exodus of subscribers this time around. Netflix hiked the the price of the standard service by a buck to $10.99 and also rolled the billing of the premium service to $13.99 from $11.99. That’s nothing out of the ordinary going by the company’s recent increases.
NFLX subs have been notoriously price sensitive in the past though, with only small increases leading to a substantial slowdown in growth. A good case in point was back in 2015 when the company fell short of its Q3 customer additions target by 700,000 after raising the price of the standard plan by a buck. Consequently, NFLX stock was badly hammered, tanking nearly 20% overnight.
So why have investors decided to turn a blind eye to the growth-dampening effects of price increases? Is price elasticity no longer a risk factor for NFLX stock? After all, Netflix subscribers on a standard plan will now pay $2 more than a standalone Amazon (NASDAQ:AMZN) Prime video user. With nearly 80 million subscribers to Netflix’s 104 million, Prime video has emerged as a credible Netflix challenger and has been growing like a weed.
Hulu is not too shabby either. The company’s average daily sign-ups had increased 98% since March, thanks to a series of scintillating shows like The Handmaid’s Tale. Adapted from a classic novel by Margaret Atwood, The Handmaid’s Tale beat Netflix to the punch by becoming the first streaming series to clinch a Best Drama Emmy in September. Hulu’s original programming budget of $2.5 billion might not be in the league of Netflix’s $6 billion, but it certainly looks like money well spent.
NFLX has a strong moat
One funny thing: Netflix has never mentioned price elasticity as a risk factor in its 10-Qs, preferring instead to talk about aggressive pricing by competitors and even mundane things like bandwidth caps by ISPs.
There’s a good reason why Netflix’s management, and now investors, are not overly concerned about the negative effects of price increases. Whereas subscriber growth almost inevitably hits the skids after a price increase, it never has hit reverse gear at any point. Netflix has consistently been able to grow its subscriber base over the last 25 quarters, and any dips in the growth clip have been only temporary.
There’s no logical reason why it should play out any different this time.
That’s a clear sign of the pricing power wielded by the company. Netflix has been able to build a strong moat around its business thanks to its huge and ever-growing library of original content. But that’s not all: the company’s margins have been improving and its losses narrowing. In fact, Netflix expects it’s full-year operating margin to clock in at 7%, nearly double the 4% average clip for recent years.
On the contrary, Hulu lost $353 million during the first half of the year, nearly double the $195 million loss booked by the company over last year’s comparable period.
Bottom line on NFLX stock
Even after the increase, a Netflix subscription is still a steal. A recent UBS study established that Netflix cost less than a third per hour of viewing compared to your average pay-TV package. In this era of cutting the cord, Netflix subs will be hard-pressed to find a better deal.
Meanwhile, RBC has estimated that the latest price hike will net the company $650 million in additional revenue in 2018. NFLX stock still has plenty of growth runways ahead.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.