Wall Street cheers Netflix because it still offers a great deal

Netflix CEO Reed Hastings speaks during Netflix Slate Event 2018 at JW Marriot on October 9, 2018 in Bogota, Colombia. 

Gabriel Aponte | Getty Images

Netflix CEO Reed Hastings speaks during Netflix Slate Event 2018 at JW Marriot on October 9, 2018 in Bogota, Colombia. 

Investors are cheering Netflix’s decision to raise prices, suggesting they view the streaming service as so beloved by consumers that they’ll willingly pay more for it.

Netflix is raising the cost of its most popular U.S. plan by $2 per month to $12.99 from $10.99. The ability to raise prices without significant subscriber churn is core to the company’s financial model, which has always subsisted on a thin profit margin.

Netflix burned through a record $859 million in cash in the third quarter and there’s no indication the company will be less aggressive going forward. Content spending is expected to rise in 2019 from the $8 billion Netflix shelled out in 2018.

Netflix, with an enterprise value of about $157 billion, trades for around 92 times earnings before interest, tax, depreciation and amortization. That dwarfs the trading multiples of Disney (13), Viacom (7.5), and AMC Networks (7.7), as investors bet Netflix has plenty of growth and market share gains ahead relative to traditional media companies.

It’s also still an inexpensive entertainment option, said Rich Greenfield, an analyst at BTIG who has a “buy” rating on Netflix. HBO charges about $15 per month for its streaming service and the average cost of traditional pay-TV tops $100 per month.

“Whether it’s a movie ticket, HBO or ESPN as part of the cable bundle, the price-value that Netflix offers is compelling,” Greenfield said, in an interview.

Disney charges about $9 to a cable company like Charter for each subscriber that gets ESPN, Greenfield said. Nearly a million subscribers cut the cord on their pay-TV carriers in the third quarter of 2018, limiting the pricing power of traditional media companies.

Netflix will use the extra cash from the price increase to “make even more stuff,” Greenfield said, rather than pay off debt or “fix its free cash flow.” That should soften the blow for the 58 million U.S. subscribers who get Netflix and may demand consistent quality and quantity if they’re going to spend more money.

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