Netflix Price Hike: How it Could Affect the Stock
On January 15, 2019, Netflix announced that it would be increasing monthly subscription costs of its three plans by as much as 18%. This would make it the largest price hike since the company’s inception in 2007 (Seigal). There have been three price hikes prior to this increase, but this is the first time that the company will be increasing the rates for all its plans simultaneously. Previously, they had increased rates of specific plans one at a time. When asked about the increase, media analyst Rich Greenfield stated that as long as Netflix continues to provide content that interests viewers, the price increase will not affect subscriptions. It is important to note that they still cost less than HBO Now’s $14.99 monthly charge.
Competition and increasing production costs were the reasons driving the price increase. Over $8 billion were used to help create the shows that Netflix put out in 2018 (Pallotta). Netflix has a reputation of pumping out shows at a frequent rate, and they feel the more they invest into creating new shows, the easier it will be to justify the price increases. Many of their top shows offer new episodes each week which in turn, keep the viewer engaged. Disney, Apple, and NBCUniversal have all announced that they will be getting into the streaming business which will provide added competition to Netflix. The increased revenue should allow Netflix to create better programming and combat the challenges from these respective competitors.
The Diffusion Group recently conducted a survey of adults to predict what percent of users were likely to cancel their subscriptions if the price of usage increased $1 per month. Approximately 16% of users claim that if this price jump was implemented, they would cancel their plans (Snider). These percentages rose as the predicted monthly rate increases grew. The Streaming Observer website also ran a poll and those results indicated that 24% of Netflix users would consider canceling if there was an increase in the monthly rates. These same numbers predicted that although an increase in price would result in a loss of subscribers, the increased revenue would more than offset the loss of subscriptions on the bottom line.
Once news came out that the company would be implementing the price increase, the stock immediately sprang upward. After a strong 2018 campaign that propelled Netflix to perform best out of the FAANG stocks, 2019 has kicked off to a hot start for the company. The day the company announced the subscription cost hike, their stock rose 6.5%. In 2019, the stock has already risen over 20% and continues to climb. In the past, the price increases proved to be a positive influence on the stock performance, as it demonstrated Netflix’s confidence that their subscribers would remain despite the increase. Their rate increase pace of 16-18 months has been maintained, which is historically important to investors as they like stability and consistency (Salinas). Top investment companies such as Goldman Sachs, RBC, and Credit Suisse all see the news as a positive as they signal buy ratings to the stock.
Most recently, on January 22, 2019, Netflix experienced a 5% decline in their stock. This is surprising news considering that it comes on the same day that one of their original films, “Roma”, was nominated for an Oscar award for best picture. This is the first time a Netflix movie has been nominated for such an award. One would expect the stock price to have a solid day; investors tend to purchase stocks at high volumes when they hear positive news about the company. The NASDAQ Composite decreased 1.9% due to fears of a stagnant economy, contributing to the decline in Netflix stock (Feiner). Today is a perfect illustration of the dependency of the value of a stock upon the success of other companies in its sector.
THE VERDICT: After looking at Netflix stock, the conclusion can be drawn that it is a good short-term option. Netflix is confident that they can keep their subscribers and that their content is worthy of the increased cost. When looking at Netflix in a long-term point of view, however, I don’t believe it is a sure thing. With powerhouse companies such as Disney and Apple looking to enter this sector, they can begin to threaten Netflix’s success. With the capital that these companies offer, it can be difficult to keep up with them. Regardless, 2019 should be interesting to see which direction Netflix chooses to go towards.
Feiner, Lauren. “Netflix Slides Even after Landing 15 Oscar Nominations, Including Best Picture.” CNBC, CNBC, 22 Jan. 2019, www.cnbc.com/2019/01/22/netflix-slides-even-after-landing-13-oscar-nominations.html.
Pallotta, Frank. “Netflix's Price Hike: How Much Is Too Much for Consumers?” CNN, Cable News Network, 16 Jan. 2019, www.cnn.com/2019/01/16/media/netflix-price/index.html.
Salinas, Sara. “Netflix Raised Prices and the Stock Soared.” CNBC, CNBC, 15 Jan. 2019, www.cnbc.com/2019/01/15/netflix-to-raise-prices-by-13percent-to-18percent-its-biggest-increase-ever.html.
Siegal, Jacob. “Netflix Just Announced the Biggest Price Increase in the History of Its Streaming Service.” BGR, BGR, 15 Jan. 2019, bgr.com/2019/01/15/netflix-price-increase-2019-standard-basic-premium/.
Snider, Mike. “Netflix Price Increases Could Cause Some Subscribers to Downgrade, Cancel Streaming Service.” USA Today, Gannett Satellite Information Network, 17 Jan. 2019, www.usatoday.com/story/tech/talkingtech/2019/01/17/netflix-price-increase-may-lead-subscribers-downgrade-cancel/2602458002/.