NFLX Stock Could Keep Rising
Most investors dismiss award shows as irrelevant to the future of Netflix, Inc. (NASDAQ:NFLX). Usually, they’d be right, but this awards season marks a turning point in the outlook for NFLX stock.
Let me explain…
With more than 75 million paying subscribers, Netflix is the gold standard in video streaming. It’s always a step ahead of its rivals, a fact even the company’s critics can’t dispute. They are bearish for other reasons. (Source: “Netflix Inc. Form 10-Q Filing,” Securities & Exchange Commission, December 31, 2015.)
Netflix bears think NFLX stock is overinflated—not that Netflix is a terrible product. Some of the smarter bears will likely bring up Amazon.com, Inc. and Hulu, LLC. Both competitors are trying to poach market share from Netflix.
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They’re buying more and more content in the hopes of luring Netflix subscribers. I don’t think their strategy will be successful. To understand why I think that, you had to watch this year’s Screen Actors’ Guild Awards.
Netflix Wins Big
Reed Hastings, the man who founded Netflix, is still the company’s chief executive officer. He built the company from the ground up and revolutionized an industry along the way. Hastings literally invented the business model that Amazon and Hulu are now copying.
That’s an important fact to remember. He has a natural feel for how the industry could evolve, so while everybody else fears sailing in uncharted waters, Reed Hastings is as cool as ice.
Is it plausible that he didn’t see the Amazon and Hulu offensive from a mile away? The facts say otherwise. Stay with me here. It’ll all be clear in just a second…
A few years ago, Netflix started pouring money into original content. The first show to come out of that strategy was House of Cards starring Kevin Spacey. He won Best Actor in a Drama Series at this year’s SAG Awards. (Source: Screen Actors’ Guild Awards, last accessed February 1, 2016.)
The second Netflix original show was Orange Is the New Black, a show set in a female prison. It won for Best Cast in a Comedy Series, as well as an individual award for Uzo Aduba.
A ton of other shows have followed, most of them successful. Then Netflix made another great leap by releasing its first feature film in 2015. It was an intense drama called Beasts of No Nation. In the film, Idris Elba played a brutal African warlord.
His stellar performance garnered a trophy for Best Supporting Actor, but once again, Reed Hastings was the true winner. His strategy was showing critical and commercial success.
What was his strategy? Simple: protect Netflix market share by turning the company into a studio.
Netflix would make its own movies and TV shows, instead of just distributing them. That was the only way to keep subscribers and maintain leverage in negotiations.
What’s Next for Netflix?
So it doesn’t matter if Amazon or Hulu win a handful of licensing contracts. There are more than enough popular shows to go around.
The metric for comparing Netflix, Amazon, and Hulu should be their powers of retention. How many customers can they hang on to when things get tough? It’s impossible to quantify that in advance, so let’s use some simple logic.
Customers are loyal to themselves more than anything else—that’s what Reed Hastings understands. They will gravitate towards content that engages them. They don’t care about corporate politics or stock prices.
That’s why Netflix started funding great artists. Keeping its subscribers enthralled was a defensive move by Reed Hastings.
In doing so, he made Netflix so much more than just a streaming service. We see the proof of that when Netflix dominates one award show after the next. It keeps winning at prestigious events like the Emmys, Golden Globes, and now the SAGs.
All in all, it’s only a matter of time until Netflix is a mainstay at the Oscars, too. The company focuses on satisfying its customer and that’s why I see higher NFLX stock prices for a long time to come.