Netflix at $8.99 or $9.99 Is Still a Bargain

Netflix (NASDAQ: NFLX  ) is finally ready to bump the rate of its popular streaming service higher. The online video giant announced that it would increase its monthly rate from $7.99 to either $8.99 or $9.99 later this quarter. Whether the increase is a 13% move to $8.99 or a 25% pop to $9.99 will be determined on a country-by-country basis. 

The increase will go into effect only for new members. Netflix had indicated that existing subscribers would be grandfathered into their existing rates for some time when it initially discussed the potential move three months ago, and this afternoon's announcement does explain that current members will keep paying the $7.99 rate for a "generous" amount of time. This is brilliant, of course. Netflix's 48.35 million global streaming accounts will be less likely to cancel if they know it will cost more to come back when Netflix refreshes its catalog. 

"These changes will enable us to acquire more content and deliver an even better streaming experience," CEO Reed Hastings and CFO David Wells write in Netflix's letter to shareholders.

That may be true, but let's not assume this isn't a scalable model if Netflix throws incremental revenue at more content. After all, there's a reason Netflix's guidance calls for streaming revenue to climb just 36% this new quarter while net income soars by a hearty 138%.

The increase will mean that Netflix's pricing advantage over Amazon.com's (NASDAQ: AMZN  ) Prime will be short-lived. Amazon recently boosted the annual rate for its loyalty shopping club by 25% to $99. Amazon Prime naturally offers two-day shipping, monthly Kindle rentals, and other goodies at no additional cost, along with access to its growing video smorgasbord, but it's also a much smaller catalog than what Netflix is offering and will likely be offering as it continues to invest in new programming.

An increase may be bad news for customers, but it's hard for them to complain. Loyal users are being grandfathered in, and this will be Netflix's first increase since it rolled out streaming as a standalone premium platform. 

Obviously, this will be good news for shareholders. The market likes price increases, even if the last time Netflix announced what was interpreted as an increase of as much as 60% by separating streaming from its DVD plan resulted in an eventual sharp pullback for the stock in 2011. It will be different this time. Customers have come to embrace the value of Netflix streaming as a premium platform on its own, and they've seen the company throw billions at content licensing.

Netflix guidance calls for modest subscriber growth during the current quarter. It's a seasonal thing. The second quarter was also its sleepiest period for net additions in 2012 and 2013. However, if the price increase keeps churn in check, it's also quite possible that Netflix is underestimating the stickiness of grandfathering existing members. Don't be surprised if net additions spike once the increase kicks in as more folks decide to stick around than those hesitant to join at a higher price.

Netflix is a deal at $8.99 or $9.99 a month, and despite being the S&P 500's biggest winner last year, it seems as if the stock isn't such a bad deal given its rapidly improving fundamentals.

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  • Report this Comment On April 21, 2014, at 6:42 PM, anindakumars wrote:

    I am not sure why one would choose Netflix over Amazon Prime? It just does not make sense IMHO.

  • Report this Comment On April 21, 2014, at 8:22 PM, umavarikuti wrote:

    Rick,

    As always, I have been waiting to here your wise and apt commentary on the earnings report.

    I wish you share your thought on more companies - for example Blackberry, IBM and Etrade :)

    Btw, I have been following your research for over a decade. Please keep it up for fans like me.

    Uma

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