Netflix's Latest Price Increases Highlight the Bull Case for the Stock

Netflix (NASDAQ: NFLX) is asking its customers to pay more once again.

Last week, the streaming video pioneer quietly rolled out price increases across all of its U.S. subscription plans. The standard ad-free tier rose to $19.99 per month from $17.99, while the premium plan jumped to $26.99 per month from $24.99. Even the company's ad-supported option ticked up to $8.99 per month from $7.99. Further, the cost to add an extra member to an account also increased by a dollar.

This move is a clear demonstration of pricing power, highlighting a key part of the long-term bull case for Netflix stock. As the company continues to invest heavily in expanding its content library, it is proving that members are willing to absorb higher costs to access its shows and movies.

But with the streaming landscape more crowded than ever, can this pricing power last indefinitely?

Image source: Netflix.

A steady march of margin expansion

Also helping the bull case for Netflix stock is its recent financial momentum.

In Q4 of 2025, the streaming company's revenue increased 17.6% year over year to roughly $12.1 billion, and earnings per share rose 31% to $0.56. The company's top-line growth was driven by a healthy mix of membership additions, higher pricing, and a surging advertising business, management explained in the company's fourth-quarter update.

Further, the company continues to demonstrate operating leverage. Netflix delivered a 29.5% operating margin for the full year 2025, up from 26.7% in 2024.

And management expects its operating margin to continue expanding.

The company is targeting an operating margin of 31.5% for 2026. This impressive profit margin expansion is fueled by the company's ability to drive average revenue per user higher without seeing a corresponding spike in its content costs. In fact, management noted during the Q4 earnings call that it plans to grow its content spend slower than its revenue in 2026.

In addition to strong profitability, the company continues to throw off heaps of cash. The company generated $9.5 billion in free cash flow in 2025 -- up from $6.9 billion in 2024.

And its nascent advertising segment is scaling rapidly, with ad revenue growing more than 2.5 times in 2025 to over $1.5 billion.

The retention test

Every time Netflix raises its prices, skeptics worry that subscribers will finally hit their breaking point and cancel their memberships. Yet, history shows that the company has managed these transitions remarkably well. In its Q4 update, for instance, the company noted that churn actually improved year over year and that retention remains "among the best in the industry."

This loyal customer behavior gives Netflix the confidence to regularly ask its massive base of over 325 million paid memberships to pay a little more.

But, of course, part of its rising revenue per user goes to the bottom line, in the form of operating margin expansion -- clear evidence of the company's impressive pricing power.

Valuation and competitive risks

The downside, however, is that investors seem to already be pricing in Netflix's pricing power.

As of this writing, Netflix shares trade at a price-to-earnings ratio of 37. A multiple like this implies that the company will continue to grow revenue at a double-digit pace and seamlessly expand its profit margins for years to come.

While an outcome like this is certainly possible, investors should keep another reality in mind: competition is heating up.

Deep-pocketed tech giants are similarly fighting for consumers' attention. In addition, these more diversified tech giants can subsidize their streaming efforts with cash from other highly profitable business segments, allowing them to undercut Netflix on pricing. If this intense competition eventually limits Netflix's ability to keep raising prices without triggering higher cancellation rates, the current valuation leaves investors with very little margin of safety.

Ultimately, I think Netflix's underlying business is performing extraordinarily well, and the recent price hikes reinforce the bull case. The company is executing on all fronts, from scaling its young ad business to flexing its pricing power. But given the high expectations already baked into the stock price, I believe it is prudent to stay on the sidelines -- at least at this price.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.