Wedbush: Nearly 80% of Netflix Subs Oppose Price Hike21 Oct, 2013 By: Erik Gruenwedel
Despite some analysts' concerns regarding Netflix’s margins and profitability, any attempt to raise its monthly $7.99 subscription fee would not go over well with subscribers, according to a new survey by Wedbush Morgan Securities in Los Angeles.
Analyst Michael Pachter said a repeat of a previous consumer survey of 1,000 Netflix users conducted this month reiterated his concerns that the subscription video-on-demand pioneer remains locked on a crash course with reality. Nearly 80% of respondents oppose any kind of price hike — a reality that investors and bullish analysts on the stock say underscore the SVOD service’s burgeoning appeal.
“The survey leads us to the conclusion that Netflix streaming subscribers remain price-sensitive,” Pachter, who remains bearish on the stock, wrote in an Oct. 21 note.
At the same time, Netflix’s inability to raise the monthly subscription fee, while increasing content license expenses, limits its ability to grow profits.
“Netflix cannot maintain high growth and high profits at the same time,” Pachter said.
Indeed, the analyst contends the pattern has resulted in a discrepancy between net income and free cash flow during the past three quarters. Pachter says the difference underscores Netflix’s ongoing investment in its content library — content that must be amortized, or reduced in value on the books by distributing its cost over a period of years.
“This means that Netflix faces an earnings headwind. Should net income continue in positive territory and free cash flow continue in negative territory, the difference will widen, and the headwind will grow into a hurricane,” Pachter said.
The analyst says Netflix’s content strategy will continue to lead to low profitability, limiting the company’s value to well below its current $349 per share price.