Netflix Stock could Surge
Netflix, Inc. (NASDAQ:NFLX) lost some fans during its last earnings report. The bears pulled out of NFLX stock, but I think they made a potential buying opportunity for the rest of us.
You see, Netflix is trying to pull off a juggling act. It is expanding rapidly into new markets while also attempting to boost its bottom line. The company wants to justify its lofty share price by cranking out more profits.
Critics don’t think they can do both simultaneously. Expansion means offering more original content, which means shows made by Netflix or licensed exclusively to Netflix’s streaming platform. It can get expensive.
Netflix is spending $5.0 billion on original content in 2016. That figure doesn’t include the amounts spent on regular content, staff, technology, or taxes. All told, the company makes a slight profit every quarter but not enough to justify its lofty valuation. (Source: “Netflix’s Earnings Flop: The Show That Really Matters,” The Wall Street Journal, April 19, 2016.)
Just to put it in perspective, Netflix made $6.1 billion in revenue last year. All that cash is getting cycled through to original content creation, which means the firm’s coffers are running dry. The company needs the earnings side of the equation to look healthier.
Netflix is lucky that it has a top-notch CEO. Reed Hastings is the company’s founder and current leader, a brilliant guy who saw this problem a mile down the road. Two years ago, he laid the groundwork to solve this crisis of faith.
Late in the spring of 2014, Hastings raised the price of Netflix’s basic subscription. Instead of $7.99, new users would have to pay $8.99. The change was only for new users.
People who already had a subscription wouldn’t be affected for two years.
Then in October 2015, the company pulled the same trick. It raised the subscription rate for new subscribers to $9.99. Old subscribers would only see their fee go up in late 2016.
Well, that moment is almost here. Rates for existing users should start to rise this month, promising huge gains for Netflix stock. The company can squeeze an extra dollar or two per month from each of its customers.
I know that sounds like nothing, but multiply it by 40 million subscribers and you have a pretty big chunk of revenue. I laid out the math in a previous article. It shows that over time, that slight increase could add about $1.26 billion every year onto Netflix’s top line.
Unfortunately, none of those developments were reflected in the company’s first-quarter earnings. None of the price hikes had been factored in, so NFLX stock dropped 10% after its results were reported.
The consensus seems to be that Netflix can’t keep growing while also becoming more profitable. But I’d argue that once the price hikes are factored in, Netflix can deliver $1.05 per share.
That’s way more than the $0.28 per share it is supposed to deliver this year. If I’m right (and I have the math to back it up!), NFLX stock should skyrocket.