Bank: Netflix has more pricing power

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A report on a survey conducted by equity analysts at investment bank Jefferies says that despite the spectacular growth and financials from Netflix there is still plenty of subscription upside for the streamer.

Jefferies conducted a survey across three key markets: the well-established US and UK markets and India – where there is undoubtedly growth potential but also fierce local competition.

Jefferies says future growth will be driven mainly by International markets, and it chose the UK and India because they represent large populations within Netflix’s fastest growing segments (it estimates EMEA/APAC growth of 39 per cent/54 per cent respectively in 2020).

The report says Netflix has pricing power in international markets, as 90 per cent of Indian subscribers and 70 per cent of UK subscribers are willing to pay more. India boasts >500 million Internet users, and the recently launched mobile-only plan should help unlock non-broadband subscribers.

“The US appears more tapped out from a pricing standpoint per our survey, but our model assumes just high-single digit domestic revenues growth vs 25+per cent in International markets. While we don’t anticipate near-term pricing alterations given the current environment, we remain confident in Netflix’s ability to experiment with additional pricing/monetisation mechanics to consistently improve ARPU over time,” says the study.

“Netflix is favoured over competitors, with most pointing to its original content and wide selection. >55 percent of respondents identified Netflix as the preferred streaming service in each region, with the next closest at <20 per cent (Prime, Video Hulu). Subscribers prefer Netflix for its original content, which we believe dispels fears that the loss of second-run TV shows will lead to churn. The results support our thesis that Netflix’s early investments in original content protect the power of the platform, mitigating churn and allowing greater control over content spend in the future,” adds the bank.

The Covid lockdown has done wonders for TV viewing, and Netflix in particular. “Engagement has increased significantly since Covid, and structural changes to the way we work may act as a long-term tailwind. ~62 per cent of UK subscribers are currently watching >10 hours per week, compared to 59 per cent in India and 38 per cent in the US (vs 32 per cent, 23 per cent, and 16 per cent pre-pandemic, respectively). A recent Gartner CFO survey reveals that 74 per cent of companies will move at least 5 percent of the workforce to permanent Working From Home post-Covid. The average working American spends 54 minutes commuting and 36 minutes on a lunch break each day, resulting in 90 extra daily minutes at home to consume entertainment,” suggests the bank.

The bottom line for Jefferies is that it repeats its ‘Buy’ rating and a target price of $520 per share. Netflix closed on July 8th at $501 per share.


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