Turn on the financial news, and the single topic I'm certain you'll hear about first is rising consumer prices. The unexpected surge in consumer demand as the U.S. economy slowly opened back up earlier this year has resulted in record levels of inflation. This trend is still strong; the Consumer Price Index (CPI) jumped 6.8% year over year in November, the largest increase in almost 40 years.
Investors can position their portfolios to take advantage of inflationary pressures by owning businesses that exhibit pricing power. Consumers who can't live without a product or service are likely to pay more over time.
Along that same vein, here's why Netflix (NFLX -0.51%) appears to be a safe bet if you're worried about inflation.
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A history of raising prices
The streaming entertainment pioneer isn't shy about raising prices. Netflix has upped the cost for consumers five times since 2014. What has happened to the business during this time? From the start of 2015 through the most recent quarter, Netflix added an incredible 159 million paying customers. Revenue in the last quarter totaled $7.5 billion, more than five times what it was in the first quarter of 2015.
The standard plan in the U.S. currently costs $13.99 per month. For this price, viewers essentially get access to a content library worth a whopping $29 billion. While Netflix is priced at a premium compared to services offered by competitors, the customer value proposition is strikingly clear. After the most recent price hike in October 2020, member engagement and churn both improved in the following quarter.
Greg Peters, Netflix's COO and Chief Product Officer, summed up the company's pricing strategy nicely. "We're just delivering more value to our members. And if we do that well, then we can occasionally go back and ask them to pay a little bit more to keep that positive cycle going," he said during the Q1 earnings call earlier this year.
Based on the company's remarkable subscriber growth over the years, I'd even argue that management has underpriced Netflix's service for customers. Even though the business won't charge extra for them, adding video games into the mix only increases the value proposition more. This supports pricing power going forward.
Because Netflix offers up a digital service, the supply-chain issues that you're probably hearing about simply don't affect the business. Companies that sell physical goods need to worry about sourcing raw materials and finding enough labor. After production is complete, they have to find ways to ship merchandise across the world. This challenging situation is currently plaguing companies in all sectors.
Looking ahead
Based on Netflix's historical cadence (since 2014) of raising prices every 15 to 24 months, it's extremely likely that management will choose to implement another price hike at some point in 2022. When customers were last asked to pay more in October 2020, the market cheered the news and immediately sent the stock 4% higher. Netflix's subscriber numbers continue increasing over time, as the company's value proposition is on full display.
A recent development that shareholders want to keep an eye on, however, is Netflix's pricing strategy in India. The business just reported that it has decided to drop prices for all of its membership tiers in the South Asian market to woo viewers in a country dominated by Walt Disney's Hotstar and Amazon Prime Video. I trust the leadership team's judgment in India, where the priority should be to gain as many users as possible, so I'm not too worried about this move.
The U.S. remains Netflix's bread-and-butter region today. Management has had no problems increasing prices as the service continuously improves. For investors who are worried about the ongoing threat of inflation, Netflix makes for a fine portfolio addition.
