Netflix raises prices again. Here's what it means for the stock.

What happened?

Netflix has changed the landscape of content entertainment.

As a subscription video on-demand streaming business, Netflix offers a wide range of content to consumers. 

In fact, Netflix has a 7.8% market share of TV screen time amongst US viewers as of September 2023. 

This would put Netflix just behind Youtube, but ahead of other video-on-demand competitors such as Amazon’s Prime Video, Hulu and Disney+.

Despite its leadership position, Netflix’s share price has seen its fair share of volatility. 

Its share price surged close to 90% from 2020 to its peak share price of $700 in end 2021.

During this period, Netflix benefitted from lockdowns globally as consumers were forced to stay at home and turned to Netflix as the main source of entertainment. 

As the world reopened, Netflix’s share price plummeted to a low of $175 in June 2022 on the back of slowing subscription.

More, Netflix’s share price rallied 16% following its third quarter results as it reported subscriber growth in key markets and a price hike on its membership plans.

What you need to know about Netflix

#1 - Introducing advertising and clamping down on password sharing

Netflix first introduced a cheaper basic plan at $6.99/month in Nov 2022 to open up an additional source of revenue – advertising. 

Subscribers will be shown an advertisement of 15-30 seconds before and in between shows, similar to what most consumers are experiencing on Youtube. 

While still in its early days, advertising revenue could play a more important role in the company’s earnings in the future as more companies advertise with Netflix. 

This move is also crucial for Netflix to segment its subscribers between those who would like to skip ads and pay more, and those who are not willing to pay. 

In its latest third quarter results, Netflix disclosed that ad-supported memberships have increase 70% compared to the previous quarter. 

Coupled with Netflix’s move to clampdown on password sharing between subscribers living in different households, this has partly help to drive subscriber growth for Netflix

#2 - Paid membership in North America showing growth again

The number of paid Netflix subscribers have shown another quarter of good growth of net addition of 1.75m in the 3Q23 to 77.32m. 

Investors have cheered how Netflix has introduced a price plans with ads and more expensive plans without ads working without impacting its subscriber base significantly.

The North America market is a crucial market for Netflix as its average revenue per subscriber is the highest at $16.29 per month.

#3 - End of Hollywood strikes

One of the biggest issues that emerged within the media industry since May was the strike by the Hollywood screenwriters, producers and actors.

The of the strike was to demand better pay and renumeration for those working behind the scenes to produce shows for viewers. 

It was estimated that 160,000 media workers in the US had joined in the strike which led to a close to a complete halt within the industry. 

As Netflix and other media companies depend on producing and streaming content to keep subscribers engaged, there were concerns that Netflix would run out of fresh content for viewers. 

There was hence much relief when an agreement was reached in September, ending a five month strike. 

In addition, Netflix has also been reducing its dependence on Hollywood for content by producing local content and shows, such as Squid Game and One Piece.

#4 - More price hikes coming

During its third quarter results, Netflix announced that will be increasing prices on its plans.

For instance, the Basic plan will now cost $11.99/month, while the Premium Plan will set subscribers back by $22.99/month. 

Netflix has raised its prices in US, UK and France in its latest round of price review. 

Netflix’s price hike mirrors the stances taken by Netflix’s peers in recent months. 

Apple has also raised its Apple TV+ to $9.99/month, while Disney+ has similarly raised its Disney+ Premium plan prices to $13.99/month.

From the price hikes, it would seem that cost of producing content is not cheap and companies like Netflix would want their subscribers to pay more for their favourite shows.

What Would Beansprout Do?

Netflix’s share price has risen by +137% year-to-date following the successful implementation of its tiered pricing plans, as well as the resolution of the Hollywood strike. 

As the cost of content creation increases, we would be keeping a close lookout for how further price increases will impact Netflix’s subscription numbers. 

According to data from Webull, most analysts have a Buy rating on Netflix’s current share with an average price target of $460.16 as of 4 November 2023. 

This would be +6.5% above its current share price of $432.36 as of 3 November 2023. 

As such, it might be worth adding Netflix in your watchlist, like how you have been adding blockbuster movies to Netflix’s playlist. 

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