Bullish on Netflix Stock
If you think it’s over for Netflix, Inc. (NASDAQ:NFLX) stock, think again. Mr. Market might not like the company that much at the moment, but going forward, there are some major catalysts that could boost NFLX stock. In particular, the third one just might send Netflix stock through the roof.
Let me explain…
If you have been paying any attention to the Internet industry today, you’d know that user growth is the priority for almost every company. The idea is that a company doesn’t have to be immediately profitable as long as it continues to grow its userbase. Once it has a large enough userbase, there will assumedly be all kinds of opportunities for monetizing strategies.
In fact, that’s exactly what social media companies have been doing—growing their userbases, then worrying about making money. Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR), two pioneers of the social media industry, amassed millions of users before rolling out their advertising strategies.
For Netflix, though, it doesn’t need complicated advertising strategies. Unlike many other Internet companies, Netflix charges a fee for its service.
You’d imagine that since the membership is not free, Netflix would have limited appeal. But that’s not really the case. By the end of the first quarter of 2016, Netflix reached 81.5 million subscribers.
Note that even though the company’s subscriber base is already huge, it has yet to show signs of a slowdown in its growth rate. In the first quarter of 2016, Netflix added 6.74 million worldwide subscribers, the largest quarterly addition in its history.
The reason behind those impressive numbers is simple: for less than 10 bucks a month, the value in Netflix’s on-demand video streaming service is just too hard to beat.
One of the things that worry Netflix stock investors is the company’s heavy investment in original content. Also, as Netflix expands its service to an additional 130 countries this January, it might have to spend quite a bit on rights and licenses before becoming globally profitable.
But as it turns out, those concerns might be overblown. According to its most recent financial report, Netflix generated $1.96 billion in quarterly revenue, 24.8% more than the year-ago period. The company also earned $0.06 per share, a 20% improvement year-over-year and double analysts’ expectations of $0.03 per share. (Source: “Q1 16 Letter to Shareholders,” Netflix, Inc., April 18, 2016.)
This shouldn’t really come as a surprise. When a company gains more users and is making more money from each user, revenue should increase. In the U.S., average revenue per user (ARPU) rose three percent year-over-year. Internationally, ARPU increased by seven percent.
NFLX Stock: An Acquisition Target?
Most recently, Microsoft Corporation’s (NASDAQ:MSFT) acquisition of LinkedIn Corp (NYSE:LNKD) has been making headlines in the tech world. On Monday, Microsoft announced that it would acquire LinkedIn for $26.2 billion in cash. Microsoft is paying $196.00 a share, a 50% premium over LinkedIn stock’s Friday closing price. The news sent LNKD stock through the roof, gaining 46.6% in just one trading session. (Source: “Microsoft to acquire LinkedIn,” Microsoft Corporation, June 13, 2016.)
Note that LinkedIn stock got slashed back in February after a somewhat disappointing earnings report. Value cannot go unnoticed forever. Those who bought on the dip were handsomely rewarded.
Netflix could be in a similar situation. Since its last earnings release on April 18, NFLX stock plunged more than 13%. Year-to-date, it’s down nearly 18%.
The troubling fact is that nothing has fundamentally changed. If anything, the company’s outlook is now better because of its newly opened 130 additional markets. If anyone wants to get into the video streaming business, Netflix could represent a great opportunity.
Since Microsoft just spent $26.2 billion, it probably won’t go shopping for a while. However, there is one company that’s quite interested in breaking into the video segment—the “iPhone” maker.
Last month, the Financial Times reported that Apple Inc. (NASDAQ:AAPL) might be interested in buying entertainment giant Time Warner Inc (NYSE:TWX). (Source: “Apple executive proposed bid for Time Warner,” Financial Times, May 26, 2016.)
Also, sources said that Apple is willing to boost its investment in original content, with plans of spending “several hundred million dollars a year.” (Source: Ibid.)
If that’s the case, Netflix could be a nice fit. The on-demand video streaming company is already spending a huge amount of money on original content and has an established userbase. If Apple could integrate that into its existing ecosystem of one billion active devices, there might be some serious synergies.
The Bottom Line on NFLX Stock
At the end of the day, whether a company like Apple would actually acquire Netflix depends on one condition: are they willing to put up with its huge spending in content?
However you look at it, Netflix is going to continue its investments in original content. In fact, that’s the main reason Netflix stock is down so much—not all investors are happy with the size of those investments.
But if the answer is yes and a tech giant actually puts in an offer to buy the company, today’s price of NFLX stock shares would look dirt-cheap.