Netflix (NFLX): Increased Price vs. Increased Churn - Nomura

Will the $2 Netflix (NASDAQ: NFLX) price increase offset increased churn? Nomura analyst, Anthony DiClemente, admits that it is difficult to answer but believes that the price increase offers incremental revenue and profit. He raises 2017 EPS by a penny to $1.25. No change to the $130 PT or Buy rating.

Netflix international growth remains unimpeached, supported by checks of app download data which suggest that the new markets launched in January provide strong tailwinds to net additions in 1Q16 and benefit 2Q16 guidance. The analysis of the impact of an underlying 2Q price increase indicates that incremental revenue should approach an annual run-rate of $505mn, driving US revenue acceleration, but the increase is a likely headwind to 2Q US net addition guidance.

Will concerns about US subscriber churn in 2Q be offset by US revenue acceleration? Looking at the price step-up scheduled for May given the releasing of a material number of US members from price grandfathering, the base case scenario analysis suggests that higher US pricing could drive ~450k cancellations across an estimated ~23mn subscribers, leading to a reduced 2Q16 US subscriber estimate of +253k (below Street expectations for +630k). Incremental churn is more than offset by a $2 price increase across the remaining subscribers, which drives more than $500mn in high margin incremental revenue annually.

Expectations for current quarter revenue are ahead of consensus, however the analyst is worried that it is very difficult to forecast the impact that the inherent 2Q price increase will have on US subscriber churn, and he would look for a more conservative 2Q guide for US subscribers from the company.

For an analyst ratings summary and ratings history on Netflix click here. For more ratings news on Netflix click here.

Shares of Netflix closed at $106.98 yesterday.

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