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Analysts Are Bullish on Netflix's Price Increase

By Daniel Sparks - Updated Apr 18, 2019 at 10:24PM

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Higher prices will fuel content investments and help profitability.

Check out the latest Netflix earnings call transcript.

Netflix (NFLX 1.60%) surprised investors on Tuesday with its fourth-ever price increase. Effective immediately for new U.S. subscribers, the company's different subscriptions will now cost 13% to 18% more than they did previously. These price increases will begin rolling out to current U.S. subscribers over the next three months.

There's no doubt that Wall Street likes Netflix's just-announced price increases. The stock soared on Tuesday, finishing the trading day up 6.5%. But why does the Street love the increases so much?

A couple watching Netflix in their bedroom.

Image source: Netflix.

Here's what analysts are saying about the increase, including thoughts from The Motley Fool's longtime Netflix shareholder and technology and entertainment contributor Anders Bylund.

A positive sign for Netflix's 2019 content

An analyst at SunTrust (via CNBC) noted that the price increase is representative of management's confidence in its "content slate and subscriber trajectory in 2018." The firm referenced a previous note to clients in which it forecasted strong content releases heading into the middle of the year.

Netflix does have some big releases slated for 2019, including Marvel's The Punisher: Season 2, Stranger Things: Season 3, and plenty more.

"When you look at the content we have coming out this quarter and next year, we couldn't be more excited, we couldn't be more busy," said Netflix CEO Reed Hastings in the company's third-quarter earnings call.

Enabling more investments

RBC analyst Mark Mahaney focused on how the price increase will help fuel "the Netflix flywheel," making the service more attractive to users. Bloomberg Intelligence analysts Geetha Ranganathan and Paul Sweeney expressed similar sentiment, noting that the company's pricing power will "help support its content investments."

Netflix does have big plans for its content spending, making every extra dollar per subscriber count. In its third-quarter shareholder letter, management said it expected to have free cash flow of around negative $3 billion in 2019 as the company makes "huge cash investments in content..."

Increased value should offset higher churn

Every price increase, of course, will see some resistance. This is why Goldman Sachs analyst Heath Terry says he expects the price hike to be "met with increased churn." But Terry says the churn will be worth it as the accompanying boost to Netflix's content will ultimately help the company deliver more value for members, justifying the price increase for enough members to more than offset this churn.

Better for profits

The Fool's Anders Bylund is looking forward to an expected lift in the streaming TV giant's profitability.

"If I'm right, we're looking at roughly 15% higher domestic revenues and wider operating margins in the long run with a forgettable growth-limiting downside," Bylund said. "Sounds good to me." 

Ultimately, Netflix's price increase likely makes the stock more compelling.

Daniel Sparks owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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