NFLX Stock Poised for Big Win
Although Netflix, Inc. (NASDAQ:NFLX) is starting to face greater competition, the future has never looked brighter for Netflix stock. The television and film industries are undergoing dramatic changes and the outcomes are sure to be profitable for NFLX stock.
Netflix depends on its ability to keep customers satisfied with the volume and variety of content it carries. At the same time, Netflix needs to invest in original content that will keep customers loyal to its platform. This is the second support beam for its stock.
So far, the company has managed to balance Netflix stock on these two pillars. The growth in the stock has actually been quite impressive since the company adopted the two platforms, but we always expected the environment to grow more complicated.
Netflix is facing competition from Amazon.com, Inc.’s Prime service and Hulu, LLC, but the situation isn’t as dire as many analysts seem to think. The big studios like Twenty-First Century Fox, Inc. and Time Warner Inc. are laughing all the way to the bank with the cash they’re making from licensing fees. Letting go of that will be difficult. (Source: “The Netflix Problem: Which Media Company Will Solve It?” The Wall Street Journal, November 15, 2015.)
The reluctance to abandon short-term revenue will keep NFLX stock on its upward trajectory.
NFLX Stock in a Mexican Standoff
The current positioning of Netflix and the big studios looks a lot like a Mexican standoff. If all the studios refused to do business with Netflix, it would certainly damage NFLX stock. The problem is that they could end up hurting each other in the process.
If, say, Time Warner says it will no longer lease content to Netflix, then it’s sacrificing immediate revenue. Licensing content is a high-margin business, so that could take a chunk from Time Warner’s bottom line, while leaving NFLX stock intact.
The damage to Netflix will only happen once a majority of studios start withholding content. For instance, if Time Warner buys a stake in Hulu (like it’s reportedly been thinking about doing), then it has a designated outlet for streaming.
But that doesn’t automatically mean that users will switch over to Hulu because of that power shift. The loss of a few shows won’t cripple Netflix. Viewers may be a little irritated at the loss of a show or a few movies, but it seems unlikely that they’ll cancel their subscription and move to another streaming service.
This is especially true since Netflix has a wider selection than any other streaming service. So the only way to truly damage NFLX stock would be for all the studios to freeze Netflix out of the equation. However, the studios can’t collude to act as one, so they have to see which firm will take the first step and then see who follows.
I’m Still Bullish on NFLX Stock
The cons to acting first almost certainly outweigh the pros. Imagine if Time Warner says it will no longer lease out content to Netflix. What does it get in exchange for its troubles? It has to keep bleeding revenue until the other studios make the jump.
But forgoing the easy revenue will get harder as time passes. As fewer people pay for cable TV and migrate online, the advertising revenue for studios is decreasing. Netflix stock is at fault for that, but I don’t see that mattering when studios are clinging to life.
Ultimately, the first few studios to make the jump might be leaping into a gaping chasm of emptiness. If the other studios don’t see subscribers cancelling or NFLX stock dropping, they won’t risk following their peers down the rabbit hole.
I can tell you that as a Netflix user, studios are fighting an uphill battle. After all, who wants to miss out on new seasons of House of Cards or Narcos or Daredevil? It’s simply not going to happen.