Netflix Soars to New Heights as Investors Anticipate Pricing Power

Netflix (NFLX) stock has skyrocketed, reaching a fresh record of around $760 per share, after the streaming giant reported better-than-expected third-quarter earnings and revenue. The company's strong performance, driven by initiatives like its crackdown on password sharing and the introduction of an ad-supported tier, has investors excited about the potential for future price hikes.

Unlocking the Next Phase of Growth: Netflix's Pricing Power Potential

Beating Expectations and Projecting Robust Growth

Netflix's third-quarter results exceeded Wall Street's forecasts, with revenue hitting $9.83 billion, up 15% from the same period last year. The company's earnings per share (EPS) also beat estimates, coming in at $5.40 compared to the expected $5.16. Looking ahead, Netflix guided for fourth-quarter revenue of $10.13 billion, surpassing the consensus estimate of $10.01 billion.For the full year 2025, Netflix expects to generate revenue between $43 billion and $44 billion, outpacing the consensus estimate of $43.4 billion. This would represent growth of 11% to 13% from the company's expected 2024 revenue guidance of $38.9 billion. The company also anticipates its full-year operating margins to reach 27%, up from the previous guidance of 26%.

Subscriber Growth Momentum and Content Slate

Netflix's subscriber additions remained strong, with the company adding over 5 million new subscribers in the third quarter, exceeding expectations of 4.5 million. This follows the impressive 8.05 million net additions in the second quarter. The company attributed the growth to the success of popular shows like "The Perfect Couple" and "Nobody Wants This."Looking ahead, Netflix expects paid net additions to be higher in the fourth quarter compared to the same period in 2024, citing a strong content slate that includes the highly anticipated "Squid Game" Season 2, the Jake Paul vs. Mike Tyson fight, and two NFL games on Christmas Day.

Diversifying Revenue Streams: Ads and Live Events

Netflix's foray into sports and live events has been well-received by investors, as the company continues to explore new revenue streams. The company's ad-supported tier, introduced less than two years ago, has also gained traction, accounting for over 50% of sign-ups in the countries where it's offered during the third quarter.In the earnings release, Netflix stated that it "continues to build our advertising business and improve our offering for advertisers." The company revealed that its ad membership was up 35% quarter-on-quarter, and its ad tech platform is on track to launch in Canada in the fourth quarter and more broadly in 2025.Last quarter, Netflix disclosed that it secured "a 150% plus increase in upfront ad sales commitments over 2023." The company has previously stated its goal is to make ads "a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyond."

Pricing Power: The Next Catalyst for Netflix's Stock

Analysts expect Netflix to raise prices again by the end of the year, which could serve as a significant catalyst for the stock. The company recently revealed that subscribers watched over 94 billion hours on the platform from January to June, although year-over-year engagement levels came in roughly flat.This potential headwind in terms of pricing power has become especially important for streaming companies as consumers become more selective with their subscriptions. On average, US consumers subscribe to four streaming services and spend about $61 per month, according to the latest Digital Media Trends report from Deloitte.Netflix last raised the price of its Standard plan in January 2022, increasing the monthly cost to $15.49 from $13.99. It also raised the price of its Premium tier by $2 to $19.99 a month at the same time, and again increased the cost of that plan last October to $22.99.Citi analyst Jason Bazinet believes that "given Netflix's low cost per viewed hour, we see scope for the firm to raise US prices by 12% in 2025." The company has yet to raise the price of its ad-supported offering, which remains one of the cheapest ad plans among all the major streaming players at $6.99 a month.With Netflix's stock trading near all-time highs, investors are closely watching for any potential price hikes, which could serve as the next catalyst for the company's shares.