Netflix plans price hike for new customers
Governments in Canada are struggling with how to get reliable Internet connections to rural areas while demand for bandwidth, spurred by data hogs like streaming television, keeps growing. REUTERS/Robert Galbraith/Files
Netflix Inc's planned price hikes will allow the video streaming company to increase spending on original content that will help attract more customers globally, analysts said, as many of them raised their price targets on the stock.
Netflix's shares rose more than 9% in early trading on Tuesday after the company said it planned to increase prices for new subscribers and reported a better-than-expected quarterly profit.
At least nine brokerages raised their price targets on the stock. Raymond James and Cantor Fitzgerald upgraded the stock to their equivalent of a "buy" rating, citing strong growth prospects from international markets.
Analysts said Netflix has sufficient room to raise monthly subscriptions for new subscribers by $1-$2 in some countries.
"This dramatically increases our revenue and profit estimates from current markets over the next three years," Pacific Crest Securities analyst Andy Hargreaves wrote in a note.
"Further, it seems highly likely that Netflix will accelerate international expansion beginning in the second half of 2014, which should expand the company's TAM (total addressable market) and allow it to drive meaningful upside to long-term profit expectations."
Evercore Partners analyst Alan Gould said he expects Netflix to face little price resistance up to $9.99 US. Subscribers in the United States now pay $7.99 per month.
Gould said the company is approaching 50 million global subscribers, and a $1-2 price increase would raise $600 million to $1.2 billion.
Gould estimates the company - home to shows such as the critically acclaimed Kevin Spacey thriller "House of Cards" and "Orange is the New Black" - will spend about $3 billion on content in 2014 and $5 billion by 2016.
Netflix, which is expected to expand to France and Germany in the second half of the year, reported a 72% jump in international subscribers on a net basis in the quarter ended March 31.
The company said its international unit would become profitable this year and that it expects international revenue to eventually surpass revenue from its U.S. market.
Netflix, which operates in 41 countries, gets about a quarter of its revenue from international operations.
"This is the year of Internet Pricing Power - Amazon , Pandora and Netflix - their value propositions are strong enough to command higher prices," RBC Capital Markets analyst Mark Mahaney said in a research report.
However, Wedbush analyst Michael Pachter cautioned that while price increases should allow Netflix to add content and keep its subscriber base satisfied, even modest price increases have the potential to slow subscriber growth and attract competition. Pachter has an "underperform" rating on the stock.
Netflix suffered from a consumer backlash and stock plunge after it announced an unpopular price increase in July 2011. Since then, the company has started producing popular original content.
Netflix, with a 32.3% video streaming market share in the United States, leads rivals such as Google Inc's YouTube, Hulu and Amazon.com Inc, according to a research by broadband networking equipment company Sandvine Corp.
Netflix shares were up 6.2% at $370.05 an hour after trading on the Nasdaq. The shares have more than doubled in the past year.