Netflix is looking to change the narrative about its stock with the price increase announcement it made Friday (January 14) — just ahead of Thursday's fourth-quarter earnings report.
Netflix shares had been trending down as subscriber growth slowed and more and more investors were questioning the profitability of streaming as competition and spending on content intensified.
The price of Netflix’s basic plan in the U.S. rose $1 to $9.99 a month, a standard subscription increased $2 per month to $15.49 and premium subscriptions will cost $19.99 a month, up from $17.99.
On Netflix’s upcoming earnings call, analysts will likely ask about management’s point of view on how the price increase will affect subscriber levels. They’ll also want to know how much of the increased price will be plowed back into content.
Before the price increase, MoffettNathanson media analyst Michael Nathanson was neutral on Netflix, but reduced his price target by $5 to $460 a share. He also reduced his outlook for Netflix sub growth and earnings.
For the stock market, adding subscribers has long seemed to be the only important metric to subscribers, and Netflix’s subscriber growth had clearly slowed down.
Having drawn record viewing with Squid Game, and with another hit on its hands in Don’t Look Up, the key questions for Nathanson were: “What if the strongest content slate in Netflix’s history doesn’t translate into a massive beat on subscriber growth? What will it say about the maturation and saturation of key U.S., Canadian and Western European markets if Netflix is unable to materially accelerate net subscriber additions when most of those markets are now dealing with the new Omicron variant, which should be a boon to growth?”
Nathanson noted that Netflix’s stock got a boost from Squid Game, but has since fallen, in part because of the underwhelming outlook for subscriber growth.
Nathanson is forecasting that Netflix will report having 222.2 million total subscribers at the end of the fourth quarter, up 8.6 million subs from the third quarter. In the U.S.-Canada region, Nathanson sees Netflix subscribers flat at 74.6 million subs.
The Wall Street consensus is not much different, with expectations that Netflix will have 222.3 million total subs and 74.6 million in the U.S.
Nathanson expects Netflix’s revenue to grow 17% to $7.774 billion, making him slightly more bullish than the Street, where the consensus is revenues of $7.712 billion.
Nathanson expects earnings to be 85 cents a share, down 28% from a year ago when production costs dropped because of the pandemic.
Looking ahead to 2022, Nathanson sees Netflix adding 27.5 million subscribers to get to a total of 248.7 million. Before the price hike was announced, he saw revenues rising 14% to $33.8 million and earnings per share growing 15% to $12.40.
The pressure to keep Netflix valuable as its price rises will intensify as content spending rises at Disney, HBO Max, Paramount Plus and other streamers.
“We expect competitive intensity to pick up in 2022 as these new entrants invest in more content production,” Nathanson said. "We believe that there is still more downside pressure to come in 2022 and our lowering our target price by $5 to $460. In other words, don’t look up, look down.”
The price increase might change the tune of Nathanson and other analysts. ■
