Netflix Could Raise Prices Again Next Year

After Netflix (NASDAQ:NFLX) raised prices in early 2019, it was clear it was done raising prices for awhile. The influx of competition this year made it even more unlikely Netflix would ask subscribers for more money every month. And when COVID-19 hit, it became a near certainty.

But the value of Netflix may have never been higher than amid the pandemic. The company saw nearly 16 million entertainment-hungry consumers sign up for the service during the first three months of the year, and management forecast strong subscriber additions for the second quarter as well.

But Netflix could come out of 2020 well positioned to raise its pricing once again at some point in 2021, as it continues to offer better value than its competitors. Bernstein analyst Todd Juenger notes, "The increased engagement and appreciation for Netflix that a growing number of consumers are experiencing in 2020 could make it that much easier for Netflix to successfully pass through pricing increases in 2021-22."

Netflix is winning viewer hours

Even with a boom in streaming hours over the last few months, Netflix is still gaining share of total viewing. The streaming leader's market share increased 1.5 percentage points between February and May, according to data from Comscore.

Additionally, there are signs its subscribers are sticking around longer, as searches for how to cancel Netflix have decreased over the last few months compared to the same period last year. Lower churn is a sign of higher engagement.

Netflix is poised to continue winning viewing hours through 2020 thanks to a strong content pipeline. Management said it doesn't expect the coronavirus pandemic to disrupt their content release schedule for the rest of the year. Meanwhile, Netflix's competitors, including traditional television networks, typically operate with much shorter timelines. So, their content slate for the rest of the year is in question.

Engagement is the key factor that determines when Netflix raises prices. During Netflix's fourth-quarter 2018 earnings call, Chief Product Officer Greg Peters said, "We look at the engagement levels and a bunch of other things too, trying to understand what our pricing should be." Coming out of 2020 with strong engagement should support another round of price increases for Netflix.

What a price increase means for investors

If Netflix raises prices again next year, it could see a slowdown in subscriber growth as consumers digest the change. Net additions severely disappointed in the second quarter last year after Netflix increased prices for most U.S. subscribers by $2 per month. In fact, it lost subscribers in the U.S. that quarter.

But with the pull forward in subscriber additions this year, it may be well positioned to withstand a period of low subscriber additions. If Netflix increases its average price by $1 per month in the U.S. and Canada, it would add an extra $850 million or so in annual revenue. Price increases in Europe and Latin America could have a similar revenue impact.

That would go a long way toward driving the company toward positive free cash flow in 2022. The company expects to burn through about $1 billion in cash this year and potentially more next year as it ramps content production back up. But positive cash flow is within reach for management and investors in the FAANG stock. Increasing prices will be a key factor in getting there.

This article originally appeared in the Motley Fool.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.