Netflix: Street Churns Pricing Models; Who Will Go, Who Will Stay?
blogs.barrons.com
Immediate responses to the price hike varied from indignation, to indecision: Which will you dump, streaming or DVD?
The blog HackingNetflix.com posted a poll yesterday, and you can see the results here. 33% of people said they will quit Netflix. Another 31% plan to go streaming-only. And 5% to 21% plan to go DVD-only or another one of the plans.
Today, the Street has fired up the Excel spreadsheets to calculate the trade-offs of higher revenue, higher margins, and what’s expected to be an inevitable increase increase in customer churn.
Bullish!
Ingrid Chung, Goldman Sachs: Reiterates a Buy rating and a $330 price target. She expects by Q4, two-thirds of the low-end streaming plus DVD subs will take a streaming only plan, the remaining one third going DVD only. She thinks Netflix’s “high-priced subs” will “stay put” and pay a 20% to 30% increase in price. The number of “streaming only” subscribers in total will rise from 50% to 55%. The resultant boost to revenue, rising to an average of $11.96 per user per month, could withstand an 18% churn rate, she thinks, before churn would eliminate the benefits of higher revenue. Gross margins should benefit, she thinks, by getting rid of a lot of those less profitable low-price subscription accounts.
Michael Olson, Piper Jaffray: Reiterates an Overweight rating, while raising his price target to $330 from $305. The new plans will accelerate the shift to streaming service and drive up profits, he thinks. Average revenue may rise to $12 per user per month starting in September, from $11.27 the first half of the year, but it will probably dip to $10.88 next year, as the number of streaming-only customers rises to 60% of total subs from a current 48%. Still, that’s higher than the $10.60 he was previously estimating for next year. He sees churn rising to 4.3% next year, from a prior estimate of 4%. That’s a “material uptick,” he notes, higher than the rate in the last three years. Olson’s estimates for this year rise to $3.35 billion in revenue and $4.51 in EPS, from a prior $3.25 billion and $4.38. For 2012, his estimates rise to $4.53 billion and $6.84, from a prior $4.44 billion and $6.71.
Bearish!
Youssef Squali, Jefferies & Co.: Reiterates a Hold rating and a $240 price target. Squali sees several scenarios in which the company can get higher revenue per user, but in which that money is offset by higher customer churn as folks ditch their plans. His “base case” is an $11.80 per month ARPU, leading to EPS of $4.61 this year. If the company makes $13.98 per month instead, it could see churn rise by 0.2 to 0.5 percentage points, bringing EPS to as much as $6.14 this year. If the company takes in less than that, perhaps $12.59 per user per month, at the higher end of those churn increases it might see EPS of $5.25 to $5.32 this year. “It is possible that churn could pick up more meaningfully than we’ve assumed in 3Q/4Q, eating into subscriber growth and valuation.”
Barton Crockett, Lazard Capital Markets: Reiterates a Neutral Rating, posing the question, “Why annoy your customers now?” given that the “economics looked fine before,” hence, there was no need to fix them. The splitting of the plans has “annoyed a large swath of users,” he writes, citing the HackingNetflix survey. “Why couldn’t Netflix have done what other subscription services do and walked up pricing over a few years, easing the shock? While Netflix can test new offers to new subs, it has limited ability to test price changes for existing subs, raising execution risk for a jarring change.” Like Squali, he sees a trade-off between increased revenue per user and increased churn.
Edward Williams, BMO Capital Markets: Reiterates a Market Perform rating, while raising his price target to $280 from $210. “The new pricing structure should have tangible long-term benefits in terms of subscribers, as untethered members of a household potentially opt for a personal plan, and as the expanding reach of mobile devices creates a larger potential opportunity. With all that said, we believe the shares fairly reflect the company’s current prospects for ongoing strong growth.” |
