MORGAN STANLEY: Netflix is benefiting from a virtuous circle

Stranger things netflixNetflixA screenshot of Netflix’s hit show, ‘Stranger Things.’

It’s virtuous circle.

Netflix has moved to raise prices on its subscription plans, which will give it the resources to push further into global markets and expand its exclusive content. That, in turn, is likely to increase its pricing power even further.

That’s the crux of a research note from Morgan Stanley’s Benjamin Swinburne. The analyst lifted his price target for the company to $US225 from $US195, a 15% increase.

This month, the company announced that it will raise prices on its standard and premium plans to $US10.99 a month from $US9.99, and $US13.99 from $US11.99, respectively.

“Netflix’s recent price increases in the US and abroad are a positive indication of its confidence in the subscriber opportunity ahead and should help fuel content investments for future growth,” Swinburne wrote.

Though Netflix received some churn when it raised prices in 2016 on “grandfathered” plans, the company has seen many users who dropped their plans come back to the fold. Those “re-joins” have also driven the upside for the company this year, Swinburne said.

Netflix’s high-quality content gives its pricing power an additional boost. Swinburne points out that Netflix has enjoyed a seasonally strong quarter for viewership and that its slate of content for the fourth quarter is also promising, with “Stranger Things,” “The Crown,” and “Punisher” coming to viewers soon.

The company recently signed a roster of creative talent with the likes of Shonda Rhimes and David Letterman, which will also prop up the company’s price.

Swinburne did have some warning words. He believes that Netflix’s reliance on third-party content may come back to bite it as US studios shift toward their own direct-to-consumer models as Disney did. US studios are also moving to licence their content to other competitors, such as Hulu.

However, the company is making its own shift to self-producing exclusive original programming that “supports its growing pricing power,” Swinburne said.

Netflix stock is trading at $US195.25 with a 53% gain over the year.

To see why Netflix’s price raise might have been the best thing it’s done, click here.

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