Netflix has decided to raise its monthly fees for American subscribers by anywhere from 13 to 18 percent as the world’s top streaming service continues to spend big on original content programming. While most readers will be interested in U.S. rates, the increase actually applies to all countries that Netflix bills in U.S. greenbacks so the rate hike will also affect Latin America in certain countries.
Wall Street reacted quickly and showed its support for Netflix’s (NASDAQ:NFLX) price increase as shares soared by as much as 7 percent during a day that saw markets trade largely sideways with most major technology companies either flat or up 1 percent at the most.
We reported towards the end of last November that Morgan Stanley had named Netflix a stock to watch, and since we ran this piece prices are up nearly 15 percent.
Despite the price hike, Netflix remains an affordable entertainment option as all three of the company’s plans will only increase by $1-2. The standard plan which is $10.99, will get an increase to $12.99, the company’s premium plan that allows for streaming on four devices will move to $15.99 from $13.99, and finally, the lowest basic tier will rise from $7.99 to $8.99.
Stock soars as Netflix seeks to increase revenue
Its no wonder why stock prices jumped at the news today. Netflix closed 2016 with over $3 billion in debt. By the end of 2017, that figure had risen to just shy of $7 billion. We don’t know how much total debt the firm has now after closing 2018, but we can say that Netflix went on the record to say that they were spending at least $8-10 billion last year both on original content and upgrading its service.
Daniel Morgan is a senior manager at Synovus Trust Co, and he expects Netflix to be sitting around $8.3 billion in total debt, with cash flow in 2019 of minus $3 billion.
It’s not a good trend when a company is both adding debt and staring down the eventual rollout of new competitors – unified streaming services from both Disney (NYSE:DIS) and AT&T (NYSE:T) are all but a certainty at this point.
With today’s news of an average of 15 percent price hike, this could translate fairly reliably to a 15 percent revenue gain for the firm from its 137 million customers and we believe this went a long way towards easing investor’s fears of Netflix’s over-leveraged debt position.
Its worth noting that Netflix has never rolled out a price increase of 18 percent before, marking this the largest ever increase to date for the streaming service. Some analysts agree that Netflix has the leverage to do this without much concern.
“It highlights that Netflix has pricing power and even after the increase it remains a very cheap entertainment alternative,” said Pivotal Research Group analyst Jeff Wlodarczak.
Netflix is scheduled to report its 4th quarter financial results this Thursday.
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