Netflix's NFL Debut: A Big Win for Streaming Sports

Here's a quiz: how much would you be willing to pay per month for the best entertainment out there?
The answer?
More than you are currently paying.
That's exactly what Netflix (NFLX) is doing, raising its fees for subscribers and that action ignited this entire market.
That's right, this morning we learned that Netflix is raising U.S. subscription fees by 13% to 18%. As of the third quarter of 2018, Netflix was generating about $11.44 on a base of 57 million customers, according to RBC Capital in a terrific piece of instant research entitled "Flexing Pricing Muscles." If you apply a 15% increase to the average revenue per user you get $1.18 billion in incremental revenues and therefore profit because it doesn't cost Netflix any more to push product to you.


That's why even though Netflix's stock had already advanced about 25% since the year began, the stock could still tack on 6%. It's now up 50% from its December lows and finished 2018 up 39%.

Why not? All of the research this morning shows that there will not be much push-back, if at all, because Netflix has been underpricing its product in order to hook subscribers on its terrific content. The actual price increase is just a little bit higher than some of the other paid services that many would regard as subpart to Netflix including HBO and Hulu.

The certainty of the price sticking? Consider this insight from Piper Jaffrey: "We believe the primary determinant in the ability to raise price is subscriber perception of content quality. In November 2018 we surveyed more than 1,100 subscribers and found that 71% of them feel Netflix content has improved in the last year. We believe as long as the vast majority of subs perceive that the service is improving, Netflix will be positioned to periodically raise prices."

Now, why is this action of Netflix so important?
First, Netflix is the N in FAANG, the acronym we created here for Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix and Google (GOOGL), now Alphabet. Because of the peculiar abundance of ETFs linked to FAANG, a move in Netflix can move the entire group. And that's exactly what happened as the ETFs moved the entire FAANG complex. I know it seems crazy but you can't underestimate the power of ETFs to move certain sectors. Netflix can and did play that role.

Second, Netflix serves as a reminder to all investors exactly how powerful the subscriber business is. A service revenue stream may be the single most lucrative business out there.


Which brings us to two other bargains, two other companies with service streams that could easily be raised and I think would find no resistance whatsoever -- the service streams from Amazon and Apple.

Amazon Prime may be the single biggest bargain I know of. I pay $119 a year for Prime. If they told me I have to pay $150 a year for the privilege of getting the lowest prices for products and free shipping, I would have no issues whatsoever. Last year Amazon put through a price increase of 20% and while we don't know how many people dropped out when they did it we do know that Amazon hit the 100 million member level which, to me, says, there's little to no resistance.

That's a big reason why I think that Amazon is not an expensive stock. Any company that offers that big a bargain for customers has a stock that may be cheaper than you think.

Which brings me to another company with a service revenue stream that has a stock that trades at a fraction of these two other companies when it comes to price to earnings multiples. I am talking about Apple. Every month I pay Apple to back up my photos and care for my phones. Every month I pay for Apple Music.

I don't pay any attention to these bills. They come from "sender" Apple, and they are automatically charged to my Amex account. If they put through a price increase on any of these I would feel compelled to pay it because all of these are relative bargains versus lost pictures, or music on another device or the incredible chaos that ensues when your wife, oops I mean my wife, throws my dirty garden pants in the washing machine when the iPhone 7 is in my left pocket. Oh and believe me, when you put that phone in a bag of rice after it's been through the spin cycle, it doesn't work. AppleCare's a better way to go.

Now I haven't heard a lot good about Apple's stock lately. All I hear about is that they had to cut production of the Xr or whatever. But nobody's talking about what happens if Apple raises the price for these services? I think they should be talking about them for the same reason that it was worth thinking about the stock of Netflix and how it has underpriced its wares. The pin action off of Netflix was barely existent for Apple even as I think that you could have an explosive move if they charged you more. It's not unlike another service revenue stream that could cause the stock to rocket.

Now FAANG would not have been able to lift if it weren't for still one more positive note about Facebook. Two research firms are now saying that estimates could be too low with Barclays today talking directly to the notion that ad rates are terrific.

On top of that an analyst from Citigroup said it is time to go all in FANG, that's the one with just one A, Amazon, which further propelled the acronymic stocks that were left for dead just weeks ago.

I don't want to miss the forest for the trees here though. We had a number of companies report results today that I think were reminders of how cheap stocks have become, so cheap that they can go up on seemingly disappointing announcements.

Take JPMorgan (JPM). When it reported this morning the stock quickly fell more than three points because the headline numbers were clear misses. Last year that might have made sense. The bank stocks had all run higher into the quarter. This time, though, the stock ended up turning around and anyone who sold the stock down three was, as I said on Squawk on the Street, a first class moron for not listening to the incredibly upbeat conference call.

Then there's United Health (UNH). The company reported numbers that were robust and even better than we heard about when the company had its analyst day at the end of November. Somehow these numbers were regarded as suboptimal and the stock got shelled before the opening, at one point shedding more than four points on the report. But had people waited for the conference call they would have learned that every line item was better than expected and the company couldn't be doing better even as its stock had been among the worst performers of the managed care companies. The result? Another blast off, with the company's stock swinging right back up as the call went on.

Now I know some would say that the UK parliament's rejection of the Prime Minister's Brexit deal should have rocked the market. In fact the Dow did almost go into the red on the news. But what matters right now is expectations and so far expectations are being exceeded by both earnings and the announcement of a price increase by one of America's favorite companies.