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Commentary

Does Netflix Have a Price Umbrella?

The slowdown in new U.S. subscriber adds after the recent price hike may suggest the firm has less pricing power than expected.

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 Netflix (NFLX) posted disappointing second-quarter subscriber adds in both the international (1.52 million net adds, versus guidance of 2.00 million) and U.S. segments (0.16 million net adds, versus guidance of 0.50 million) in part because of the price increases to older, previously grandfathered accounts. The company also issued weak subscriber guidance for the third quarter (0.30 million in the United States) and management expects some continued impact from grandfathering and from the Olympics. Revenue and adjusted operating income were in line with our expectations. Even with the lower add numbers, Netflix continues to expand its streaming base, ending the quarter with more than 79.9 million global paid subscribers, up from 62.7 million a year ago. We retain our narrow moat rating and our $69 fair value estimate.

The much lower U.S. net adds (versus 0.90 million a year ago) and the low guidance for the third quarter (versus 0.88 million a year ago) tells a story of a faster-than-expected decline in subscriber growth. While we projected subscriber net add growth to gradually decrease, the current results and guidance are surprising, given the 2.23 million adds in the U.S. in the first quarter. While management attempted to blame the media for reporting the end of the grandfathering period as a price hike, we believe that an increase from $7.99 per month to $9.99 feels like a price hike to some subscribers, even if it took two years to occur. The increase in churn could also possibly signal the end of the widely held belief that Netflix has a pricing umbrella under $15 in the U.S. 

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Neil Macker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.