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Analysts weigh Netflix price hike as media stocks climb

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Analysts weigh Netflix price hike as media stocks climb

The broader markets continued to grind upward during the week ended Oct. 6, with media and communications stocks along for the ride.

There were certainly more media winners than losers during the week, with legacy streaming powerhouse Netflix Inc. leading large-cap names upward. News broke Oct. 5 that Netflix would raise the price on its iconic video subscription service by $1 per month for its basic U.S. HD subscription and $2 for its 4K streaming plan. For investors, the extra per-subscription revenue should flow straight to the bottom line, the company's EPS and in turn the market valuation.

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The price increase should lead to an 8% increase in average revenue per user. Barton Crockett of FBR Capital Markets said in an Oct. 5 note. But Crockett maintained a measured tone in his response, noting that Netflix already signaled such a shift, and many investors had the increase already baked into their models.

The news comes after a bull run for the digital content giant, triggered in part by a big second-quarter earnings beat. To date, Netflix stock is up over 20% since the July 17 release. But while the pricing news seems to have driven more upside, it also raises some questions. For one, Netflix raised prices in 2015, and that led to some related subscriber churn. Also, some analysts continue to question Netflix's premium valuation, particularly after the past three months of share-price growth.

"Notwithstanding its domestic price increase, we expect Netflix to burn cash to fund content acquisition for many years. International profits may remain elusive due to competition for content and subs, and the price increase is likely to cause a deceleration in domestic growth. Negative [free cash flow] makes [a discounted cash flow] valuation impossible," Wedbush Securities analyst Michael Pachter said in an Oct. 6 note.

Pachter was notably bearish on Netflix, maintaining an "underperform" rating and raising the price target to $88, more than half the $198.02 Oct. 6 closing price.

Crockett was a bit more optimistic, noting that with a strong subscriber trends, a high-demand original content slate and a more experienced management team, Netflix will likely manage churn better this time around compared to the prior rate hike. But he remained neutral in the end. "The key for the story now is international growth. And a U.S. price hike says little about that," he concluded.

Netflix shares climbed 9.2% for the five trading days ended Oct. 6.

Elsewhere in Silicon Valley, Alphabet Inc. made headlines with a new Pixel smartphone, and, combined with its acquisition of part of HTC Corp.'s team, investors seemed to be happy with the search giant's recent foray into mobile device tech. Alphabet shares added 2.1% for the week.

Turning to the movie business, theatrical advertiser National CineMedia Inc. enjoyed a boost as the box office turned sharply positive in September, and even as AMC Entertainment Holdings Inc. disclosed it sold an additional 2.8 million shares of the company. Supporting gains across the theater industry, the first month of the fall season clocked a box office record. Ticket sales in the U.S. climbed to $708 million in September, the highest historical result for the month and the first time September outperformed the summer months.

National CineMedia shares jumped 5.7% for the trading week, and AMC added 3.4%.

In the print media business, Gannett Co Inc. enjoyed a bump in market capital as it acquired a stake in culinary online media company Grateful Ventures LLC. Gannett expects the investment to allow it to expand and diversify USA Today Network's portfolio and audience and increase the number of Gannett's owned and operated digital sites.

Gannett shares put on 5.1% for the five days ended Oct. 6.

Social media operator Twitter Inc. enjoyed a bounce back after a tough prior week where it was forced to shut down hundreds of Russia-linked accounts on election-hacking concerns. Twitter shares rebounded by 5.8% for the week.

In small-cap news, internet of things company ORBCOMM Inc. shares popped after it scooped up Ireland-based transportation-management company Blue Tree Systems Ltd. for about $36.8 million. ORBCOMM will also add Blue Tree's U.S., Germany and France subsidiaries to its business, and for the week ended Oct. 6 investors added about 11.8% to its market cap.