Rate Hikes Have Ultimately Hammered Netflix, Inc. (NFLX) Stock in the Past

The market is cheering the higher monthly fees, but consumers have shown they'll drop their Netflix service for pricing reasons

Earlier this month, streaming video giant Netflix, Inc. (NASDAQ:NFLX) announced it would be raising its prices — for all users — over the course of October and November. The NFLX stock price jumped, of course, because… hey, why not? A higher subscription price means more revenue, which in turn sets the stage for more respectable profitability.

Rate Hikes Have Ultimately Hammered Netflix, Inc. (NFLX) Stock in the Past
Source: Shutterstock

What if, however, the company’s higher prices turn current and would-be subscribers off, forcing them to find alternatives?

That’s the minority opinion to be sure. Most investors and third-party observers view this as a win. Just as a reminder though, NFLX stock suffered at least temporarily following the company’s previous price increases, and the stage may be set for such another headwind.

There’s also the not-so-small possibility that Netflix may not recover as quickly or as well this time around, as there are now more viable alternatives to Netflix than ever before.

Past Price Hikes Didn’t Go Over

On the off chance you’re a subscriber that’s not yet heard, if you’re paying to watch Netflix on two or four devices (the “standard” and “premium” plans), by the end of next month you’ll be paying $10.99 or $13.99 per month for your service, respectively. That’s a $1 increase in the monthly fee for the former, and a $2.00 price hike for the latter. The basic one-stream package will still only cost $7.99 per month.

What’s a couple of bucks per month? A price increase of less than the cost for a decent cup of coffee should be no big deal, right?

Wrong. The price/demand dynamic for streaming video service are oddly elastic though.

One only has to look at the last time Netflix bumped up its prices. That was in April 2016, when the company announced a $2 monthly price increase for existing members. For that quarter, the company only added 160,000 new U.S. members, and only 1.7 million newcomers globally, falling well short of the 2.5 million it had expected. That was the weakest U.S. subscriber growth the company had ever reported since it began disclosing the data in 2012.

Netflix stock fell 13% following that report, by the way.

It wasn’t the only time NFLX stock suffered in the wake of a price increase though. Back in October 2014 Netflix stock tumbled by double digits after a $1 increase in its monthly price translated into the addition of only 3 million new global subscribers, and only one million new signups in the U.S. Domestic signups fell from 1.3 million in the same quarter a year earlier, and the company was expecting a total of 3.7 million new enrollees worldwide.

To be fair, Netflix has recovered from each of its pricing-prompted setbacks before, continuing to broadly ramp-up membership, and the company’s top line. However, each rebound seems tougher to muster than the last though, and that struggle is only apt to worsen as time marches on. Why? Because streaming video choices exist that simply weren’t around, or at least weren’t fully appreciated, until now.

This Competition is Getting Fierce

Though Hulu’s been around since 2007 and Amazon.com, Inc. (NASDAQ:AMZN) has been offering on-demand, streaming television content since 2011, both spent their formative years paling in comparison to Netflix; NFLX simply had a tremendous lead, leveraging the name it had built while it was renting DVDs by mail. As is always the case, though, time and success breeds better competition.

 

 

And it’s not just competition from the likes of Amazon and Hulu anymore either. As consumers have become more comfortable with the idea (and operation) of on-demand video, hybrid services like PlayStation Vue from Sony Corp (ADR) (NYSE:SNE) are gaining traction. Vue is a hybrid in the sense that it offers on-demand content as well as actual network broadcasts just like traditional cable services do, making it a true — and robust — alternative to cable TV without actually sacrificing real-time network programming. That’s something Netflix can’t do.

Walt Disney Co (NYSE:DIS) is also planning its own stand-alone streaming service, which will eventually strip Disney content like the Marvel and Star Wars franchises from NFLX’s content library. Though Netflix is increasingly making its own programming, the loss of popular third-party content like that from Disney against a backdrop of higher monthly fees — not to mention the approach to the point of saturation — may well mark an alarming turning point in Netflix’s existence.

Bottom Line for NFLX Stock

As was noted above, the pessimistic, glass-half-empty view of the impending price increase isn’t the popular one right now. NFLX stock is up following the news.

That could be short-lived strength though, prompted more by the rose-colored glasses market environment we’re in; that is, optimism, mostly rooted in the fact that investors are choosing to ignore frothy valuations and are betting on a favorable tax-rate overhaul. Those things don’t matter right up until the point they do matter. Then they matter in spades.

In this case, they may start to matter right around the time Netflix has to report its subscriber growth numbers for the current quarter. History has already demonstrated the initial responses to higher prices can be ugly. They may be even uglier this time around.

You may want to tread lightly if you own or are about to own NFLX stock.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/rate-hikes-have-ultimately-hammered-netflix-inc-nflx-stock-in-the-past/.

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