On Tuesday, Netflix announced it hiked its DVD, streaming video plan price by 60 percent. Almost immediately, customers complained online and many threatened to cancel their subscription.
The next day, though, Netflix’s stock shot up by 9 points. How could this be?
Cramer explained that Netflix simply separated its streaming video plan from its DVD-by-mail plan. The streaming price plan remains the same, but customers who want both will have to pay up. While these prices hikes may have been lousy public relations, Cramer thinks the business strategy makes a lot of sense. Netflix has created an incentive for people to stop watching DVDs and switch to online content, which is more profitable for the company. After all, it’s a lot cheaper to send content over the Internet rather than send via U.S. Mail.
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While some customers may cancel their subscriptions, Cramer thinks the higher prices will offset the potential churn. Netflix has pricing power, too.
Bottom line: Netflix is a turbo-charged momentum stock and the company’s management team knows what they’re doing. Cramer thinks that management team deserves the benefit of the doubt that the prices hikes are a sound money-making strategy.
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