Less than a week before Netflix (NFLX 0.39%) disappointed Wall Street by providing weak first-quarter 2022 guidance of just 2.5 million new customers, the business announced that it would be raising prices in the U.S. and Canada. The stock reacted positively to the news, finishing the trading session up 1.3% that day. But so far this year, Netflix shares are down 29%.
Price hikes have traditionally been a sign of strength for this top streaming stock, but this time could be different. Continue reading to understand why.
Netflix has proven its pricing power
Asking customers to pay more is nothing new for Netflix. The business has increased prices several times over the years. In fact, this is the sixth time since April 2014 that the company increased the cost of its standard plan in the U.S.
While higher prices might initially discourage new customers from signing up, Netflix has rapidly grown its subscriber base over time. The company went from having 57.4 million members at the end of 2014 to having 221.8 million today.
When Netflix last raised prices (in October 2020), the following quarter's results surprisingly showed higher engagement and lower churn. To be fair, a year ago, many people were still in lockdown mode and spending most of their time at home, a favorable situation that made Netflix a top entertainment option. Nonetheless, it shows how confident management is in its value to its customers.
COO Greg Peters highlighted Netflix's pricing strategy on the Q4 earnings call, saying that if the company can continue investing "into better stories, more great storytelling, bigger movies, more variety," it won't hesitate to ask customers to pay a bit more. And despite the weak guidance for the current quarter, if the leadership team wasn't comfortable with Netflix's value proposition, they certainly wouldn't have hiked prices.
If history is any indication, it's probably a good idea not to question management's decision-making, as they've been tremendously successful over the past decade.
Is this time different?
But after the latest financial release, Netflix investors are questioning the company's trajectory going forward. Historically, adding 25 million customers in a year and registering annual revenue growth in excess of 20% was normal. However, the U.S. and Canada (what Netflix calls UCAN), which represented 42.9% of total sales in Q4 and is the company's largest segment, could be reaching a saturation point.
Of the 18.2 million members Netflix added in 2021, just 1.3 million came from the U.S. and Canada. And while leaning on international markets for growth is what shareholders are betting on, even that isn't looking like a sure thing nowadays.
For example, in India -- a country expected to have 900 million internet users by 2025 -- Netflix is struggling to gain traction. In stark contrast to its domestic strategy, the business reduced prices in the country in an attempt to catch up to streaming players like Amazon Prime Video and Walt Disney's Hotstar, both of which have more members than Netflix in India.
Higher prices in the U.S. have traditionally been implemented to offset lower-priced plans overseas. This balancing act is looking increasingly difficult for management to execute.
Is Netflix facing a more threatening competitive environment to attract subscribers? Or is this another sign of the company's proven pricing power? Time will tell whether Netflix's latest price hike was the right move -- stemming from a position of strength -- or a decision to make up for slowing subscriber growth, a clear indication of a weakening business.