The Netflix stock price was up slightly today (Friday) after the company announced it will be raising the price of its basic monthly service from $8.99 to $9.99 per month.
The news was announced on Thursday, and Netflix Inc. (Nasdaq: NFLX) stock climbed 12% intraday. It closed up 6.3% to $114.93.
The Netflix stock price has now climbed 15.2% since Sept. 29. That's a huge rebound for the stock after it fell 20% between Aug. 17 and Sept. 4.
While a $1 raise per month seems small, Netflix now boasts more than 69 million global customers. When the subscription raise is fully integrated, that's another $69 million per month in revenue for the company. Over a year, that translates to roughly $828 million in revenue.
That price raise is part of the reason that Pacific Crest Securities raised its Netflix stock price target to $140. That's 22.7% higher than today's opening price of $114.11.
Money Morning Defense & Tech Specialist Michael A. Robinson agrees...
"The fact they are able to raise subscription prices on new subscribers means they are confident in their growth ability, and their ability to add new subscribers," Robinson said.
Robinson is also encouraged by the company's growth trajectory. It's estimated that the company now has roughly 69 million global subscribers. This time last year, it had just over 53 million. In October 2014, it was just 40 million. If you go all the way back to October 2012, the total was 29 million.
"Netflix is seeking to become the preeminent provider of content globally," Robinson said. "Right now, they are going through an Amazon.com Inc. (Nasdaq: AMZN) style growth period. It's the Bezos model - build, build, build - then the profits will follow."
While the case for the Netflix stock price is bullish, it's not the perfect investment for every investor, says Robinson. Here's what every investor needs to know about investing in NFLX stock...
Netflix Stock Price Climbs Today - Is It a Buy?
While Netflix is one of the best growth companies on the markets now, there's no denying that Netflix stock is one of the most expensive stocks on the market.
According to Yahoo! Finance, Netflix stock has a forward P/E ratio over 367. By comparison, major tech competitors Apple Inc. (Nasdaq: AAPL) and Google Inc. (Nasdaq: GOOGL) have forward P/E ratios of 11.4 and 19.9.
It's also an extremely volatile stock. As we saw from the 20% sell-off in late August, the Netflix stock price is subject to wild swings periodically. And it's always volatile following earnings. Netflix will report Q3 earnings on Wednesday, Oct. 14.
"The next couple of quarters may be dicey for Netflix stock because of the stock market," Robinson said. "This stock's personality is that it periodically goes through sell-offs. You need to be thinking long term with Netflix."
For those reasons, you can't take a short-term investing approach with NFLX stock. Robinson says that Netflix stock is a good long-term investment for investors who are willing to take on risk.
"They are in a period of global growth, and I like it at this price near $114," Robinson explained. "But the risk there is that it's been volatile lately. If you can hang in and go through any volatility, you can be okay with Netflix stock long term."
The stock's price is based on its growth potential. Robinson says that if growth stops, the stock could be in for a sell-off.
That's why he recommends investing in Netflix stock with what he refers to as a "cowboy split."
"The Cowboy Split entails buying a portion of your target stock at the market price and then putting in a lower limit order for the rest of the position you'd like to buy," Robinson explained.
Let's say you want to buy shares of XYZ Corp., and they trade for $100 right now. First, take half of your investment capital and buy shares at that $100 price.
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After that, enter a lowball order at a lower price point you would be comfortable buying at again. Say $80.
"That way, you catch any rally that occurs on that first tranche, and you set yourself up to pick up even more on any sizeable decline," Robinson said. "You end up with an average purchase price of $90 a share."
"So when the stock climbs to $120, you've increased your profits by a bigger margin, a total return of 33% versus the 20% you would have made by taking a full position at $100 a share."
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