Buy Netflix because of its amazing power to raise prices: Bernstein

Mike Blake | Reuters

Comic con fans gather at the Netflix booth at Comic Con International in San Diego, California, July 19, 2017.

Investors are under-estimating Netflix’s ability to charge more for its video streaming service, according to a top Wall Street firm.

Bernstein reiterated its outperform rating on the company’s shares, predicting Netflix will thrive from its recent price increases without any big detrimental effects.

“Looking at the history of past Netflix price increases, the impact on the pace of net sub additions has not been severe, and has been decidedly temporary – and we believe the Netflix service is even stronger and more entrenched now,” analyst Todd Juenger wrote in a note to clients Thursday. “We believe this price increase, sooner than expected, shows Netflix management has reason to be confident in their sub trajectory and price inelasticity.”

Netflix announced last week it is raising prices for some of its subscription plans. The company’s $10 per month high-definition plan now costs $11 per month. Its 4K streaming plan, which enables higher resolution video streaming, will cost $14 per month, up from $12 per month.

Juenger raised his price target for Netflix shares to $230 from $203. The new target is 18 percent higher than Wednesday’s closing price.

Netflix has raised prices for new subscribers at a 10 percent per year rate since 2014, the analyst noted, and still has been able to increase its U.S. subscriber base to 50 million from 34 million.

“For anyone who still questions whether Netflix has pricing power,” Juenger wrote in the note, referring to Netflix’s ability to gain customers as it is raising prices. “How many businesses can you name that have done that?”

He predicts the pricing changes will add more than $600 million of incremental cash flow per year to Netflix. Jeunger forecasts the company will increase its average revenue per user by 3.8 percent annually going forward.

Netflix shares have rallied 57.5 percent this year through Wednesday, compared with the market’s 14.1 percent gain.

Its shares are up 1.4 percent shortly after Thursday’s market open.

— CNBC’s Michael Bloom contributed to this story.