Netflix, Inc. (Nasdaq: NFLX) is reportedly testing a new premium tier called Ultra in Europe. If Netflix chooses to eventually expand the new tier globally, it could potentially provide a meaningful boost to the company’s margins and revenue.
According to CNET, Netflix Ultra subscribers get access to Ultra HD streaming video and audio on up to four devices simultaneously. Ultra is currently priced at 16.99 euros per month, or about $20. Ultra is the fourth subscription tier being offered in Europe, priced above Basic at 7.99 euros, Standard at 10.99 euros and Premium at 13.99 euros.
Netflix spokesperson Smita Saran said the Ultra testing is not available to all Netflix members and it may never be offered on a large scale in its current form or at its current price.
“We continuously test new things at Netflix and these tests typically vary in length of time,” Saran said. “In this case, we are testing slightly different price points and features to better understand how consumers value Netflix.”
NFLX stock currently has a forward price-earnings ratio of 84.9, one of the five steepest valuations in the entire S&P 500 index. However, the stock is also up 103 percent year-to-date, one of the five biggest gains among S&P 500 components.
A large part of the bullish thesis for Netflix revolves around its pricing power and the potential for the company to significantly boost earnings at any time by raising prices and/or adding more premium tiers, such as Ultra. Netflix could also encourage subscriber conversion to the premium tiers by cutting features for its lower tiers. Recent promotional materials from Netflix suggest the company may be soon be halving the number of screens included in its Premium and Standard plans in certain areas where it is testing the Ultra tier.
Bank of America analyst Nat Schindler says pricing will be one of the major catalysts for NFLX stock over the next decade.
“We assume Netflix can reach 90 million subscribers in the U.S. within nine years and will raise prices at a 7 percent [compound annual growth rate],” Schindler says.
He says Netflix’s massive original content library gives it flexibility on pricing and insulates the company from the competition.
“Despite great success growing subscribers, we see…
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