There's little doubt that Netflix (NASDAQ:NFLX) has a lot working in its favor. Cord-cutting is gaining momentum, streaming adoption is growing, and international growth is just getting started. Yet all Netflix needs to raise billions of dollars is one simple move.
In this episode of Fool Live that aired on Oct. 29, "The Wrap" host Jason Hall and Fool.com contributor Danny Vena discuss Netflix's decision to raise prices and what overall impact it will have on its results.
Jason Hall: Danny Vena, go ahead, let's talk about your little Smarter, Happier, Richer. Something about Netflix?
Danny Vena: Something about Netflix. One of the tenants of my investing thesis in Netflix is not only the fact that the company has secular tailwinds, not only the fact that it still has a huge international opportunity for growth, but also the fact that Netflix has pricing power. One of the things is that Netflix has been able to continue to grow through not only the pandemic but in the years leading up to the pandemic and still continually raise its prices. I remember an article that I read by Rick Munarriz, who talked about the fact that Netflix raised prices four times in five years. Now, they haven't raised prices since January of 2019, but that just changed.
There's a story out right now. I'm sharing my screen here. This is an article in Variety. Netflix is raising the price of its standard plan in the U.S. to $14 a month. It goes on further down here to say that the premium tier is going up by $2.00 a month, so from $15.99 to $17.99. The basic plan, that's just a single-stream, no HD, no concurrent users will stay at $8.99 or $9 a month.
Now, I think that's important because the fact that we are in the pandemic, and just look here, Netflix currently has about 195 million users. I pulled up a spreadsheet and just did some quick math here. A dollar a month, if we're to assume that it'll average out to a dollar a month and that's probably not exactly right, but it's close enough for estimates, Netflix is going to add about $2.34 billion to its income next year, to its revenue. Now, this year, if Netflix hits at 6.5 billion in revenue in the fourth quarter, it's going to end up making just short of $25 billion for the year. Essentially, adding $2.3 billion to your income, that's a 9% increase just from raising prices, just that once.
I think that just goes to talk about how much Netflix has room to run. This is without even the international growth. This is without even adding more people both in the United States and outside. The fact that they can just raise their prices and boost their revenue by 8% or 9% in one fell swoop. I think that really talks about the power of Netflix as an investment.
Jason Hall: Pricing power and incremental margin. It is a beautiful combination. It really, really is.
Danny Vena: It's also going to make me richer because Netflix is my largest position.
Jason Hall: That's awesome. That's fantastic. I'm sure that's probably the case for quite a number of our fellow Foolish viewers right now.