Value investor Bill Nygren likes Netflix, saying it won't lose subscribers on price hike

Key Points
  • Oakmark's Bill Nygren sees value in Netflix.
  • Netflix has been underpricing its product in exchange for super-normal subscriber growth, he says.
  • He thinks the new price hikes won't scare away subscribers.
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Veteran value investor Bill Nygren is betting on Netflix — and he does not think its new price increase will impact subscriber growth.

The Oakmark portfolio manager told CNBC Tuesday he bought more Netflix shares during the December sell-off.

Nygren said on "Fast Money: Halftime Report" he's not concerned about the streaming video service's newly announced price hikes of between 13 percent and 18 percent for its 58 million U.S. subscribers.

While there may be some debate on whether Netflix is actually a value stock, Nygren said, by his measure, it is.

Nygren does not think that GAAP accounting does a reasonable job of measuring Netflix's value. GAAP, which stands for generally accepted accounting principals, is the common set that companies follow on financial statements.

Instead, he looks at AT&T's acquisition of Time Warner, which cost $85 billion. That's a price that only makes sense if AT&T thought HBO subscribers were worth about $1,000 each, Nygren argued.

By comparison, Netflix is selling at less than HBO on a per-subscriber basis, yet its subscribers are growing at 20 percent instead of flat-lining, he explained. Both Netflix and HBO have more than 100 million subscribers worldwide.

"Our thesis on Netflix from the beginning is that they were underpricing their product in exchange for achieving super-normal growth in subscribers, an economic trade-off we thought was well worthwhile," he added.

Fans gather at the Netflix booth at a trade show.
Mike Blake | Reuters

Nygren joined Harris Associates, the investment advisor for Oakmark Funds, in 1983. He's been portfolio manager of the Oakmark Fund since 2000. The OAKMX, which has $21.5 billion in assets as of September 2018, is beating the S&P 500 so far in 2019 after coming up short in 2018. The fund has largely beat the index going back to 2010.

Netflix's price increase, which sent shares soaring on Tuesday, means it's basic plan will cost $9, up from $8. Its most popular HD standard plan will cost $13, up from $11, and its 4K premium plan will cost $16, up from $14.

Nygren said the new prices show what a value Netflix is to the customer. "We don't think they'll lose subscribers or even slow their subscriber growth despite having somewhat of a meaningful price increase."

Wall Street analysts largely agree. In notes to clients, they said it showed management's confidence in the upcoming content releases.

Netflix shares have been on a roll so far this year, gaining more than 30 percent, including Tuesday's sharp increase.

The stock, overall, had a strong 2018 as well, rising nearly 40 percent to close out the year at $267. But in the first six months it had more than doubled to an all-time high of $423 in late June, only to lose nearly 45 percent by the close on Christmas Eve.

Like many of the big tech stocks, Netflix remained in correction territory as defined by a decline in an asset price of 10 percent or more from recent highs.