Netflix Price Increase: Is It Time to Dump the Stock?

While many of its customers are grumbling about planned price increases, shares of Netflix Inc. (Nasdaq: NFLX) have been surging, reflecting the movie-DVD online streamer’s huge popularity.

Since early March, the stock’s value has jumped about 50 percent to just under $300 per share, an all-time high.

But there are concerns that the stock might now be overbought. The $15.4-billion company (by market-cap) trades at a lofty price-earnings ratio of about 83.7 (according to Google Finance)

A blogger on Seeking Alpha wrote: “I think the recent price hikes are a prelude to a disappointing earnings announcement on July 18. I think margins will be worse, and possibly subscriber growth will not meet expectations. I think now is the time to sell.”
[However, the blogger still likes Netflix’s longer-term prospects]

Tony Wible, an analyst at Janney Capital Markets, who has a “sell” recommendation on the stock, wrote in a research note that while the market reacted favorably yesterday to the price increases as a sign of pricing power, “we believe the move shows that NFLX’s old pricing model was unsustainable as the company was losing money on a cash basis, which it masked through accounts payable increases and accounting treatments on the income statement.”

Wible also wrote: “The push into Latin America, the looming Starz renewal, and the massive up-tick in off-balance sheet obligations increase the cash pressure on the business and were likely factors for NFLX to drastically increase pricing. The move will increase [average revenue per user] and churn while slowing [subscriber] growth.”

Wible added that while it’s too early to know if there will be a “net benefit or loss from the [pricing] change,… we do know that the risk around the [Netflix] story has now intensified – especially if it creates an opportunity for competitors.”