Netflix Inc. recently confirmed and enacted a price increase for its new subscribers, which will roll out to existing subscribers in the coming months. Predictably, investors reacted bullishly.
According to S&P Global Market Intelligence data, Netflix shares jumped about 5.4% on the day of the news, which was first reported by Mashable on Oct. 5, and 7.4% on the following day. For the five-day trading week ended Oct. 6, Netflix shares were up 9.2% in total.
Investors tend to buy in on Netflix price increases, according to data compiled from Kensho Technologies Inc. Kensho's market data reveals an average increase of 2.2% in the value of Netflix stock on the day following price increases, derived from an analysis of 11 price-increase events for the Netflix platform globally. The latest increase marks one of the biggest stock reactions for U.S. subscription plan changes, on par with the stock reaction to a 2014 price increase.
Financially, price hikes should increase the company's valuation, considering the extra amount added to the subscription flows directly to Netflix's bottom line as there are no additional costs associated. But that largely depends on how an increase impacts subscriber rates, and how Netflix manages that impact.
For example, in October 2015 the company announced it would increase the standard subscription rate to $9.99, up from a new-member rate of $8.99. However, there were many existing subscribers that were still paying $7.99. Both those and the existing $8.99 subscribers were grandfathered in to the lower rate, but only temporarily. The company in May 2016 began un-grandfathering those subscribers, pulling them up to the $9.99 plan, and it absorbed some undesirable membership and market results from the move.
"I think what we're seeing is change resistance," CEO Reed Hastings said during a July 2016 earnings webcast, referring to a massive shortfall in new member additions. The company had guided for 2.5 million new member additions, but it only delivered 1.7 million, and Hastings attributed the miss to the price increase. Netflix shares tumbled precipitously after the announcement.
With the benefit of more experience with price hikes, some analysts believe Netflix will handle the current transition better and minimize negative effects on its stock and subscriber numbers.