Netflix's price hike tells us a lot about its subscriber numbers, analyst says

Netflix CEO Reed Hastings. Picture: Getty Images

Netflix‘s price hike for US subscribers is a strong signal that its subscribers are growing strong, according to one Wall Street analyst.

The company on Tuesday said it’s raising US prices by 13% to 18%, its biggest increase ever. As of January 15, Netflix’s basic plan will see a $US1 per month increase to $US8.99 while its most-popular standard plan will jump to from $US10.99 per month to $US12.99. It’s the fourth price hike over the past 5 years for Netflix’s US product, but just the first hike for the basic tier.

The price increase came two days before the streaming giant’s fourth-quarter earnings release, prompting investors to speculate about whether the company’s subscriber trends are strong enough to encourage it to raise price or too slow that it has to increase the price to offset the weakness.

We “got a strong signal that subs are growing at/above management expectations as well,” Todd Juenger, an analyst at Bernstein, said in a note out on Tuesday.

“If sub trends were weak, we would expect at this point to observe other efforts, aimed at driving adoption. Not a substantial price increase.”

After Netflix raised its price globally in late 2017, subscriber growth continued to blow past Wall Street estimates. By Juenger’s calculation, even as the standard plan increased to $US12.99 per month, its users will still stick to the platform because of the value of the service.

Juenger has an “outperform” rating $US421 price target – 19% above where shares are trading Tuesday. Shares rallied 6% following the price-hike announcement.

And Eric Schiffer, CEO of the Patriarch Organisation, a private investment firm agrees that Netflix’s loyal consumers will embrace the price increase.

“This is not enough of an incremental price increase,” Schiffer told Markets Insider. “That’s not gonna horrify a large number of subscribers.”

Schiffer added the price hike provides Netflix an opportunity to raise cash for its content spending.

Netflix in October warned investors the costs of developing original content will take a bite out of its profit. It said its cash burn in streaming content will hold steady at $US3 billion for the fiscal year 2018, and that its negative free cash flow will remain negative in 2019.

To offset its negative cash flow, Netflix has been borrowing heavily to pay for content. In October, the company launched a $US2 billion debt offering and has accumulated more than $US10 billion of debt so far.

Netflix was up 60% in the past year.

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