The Upside for NFLX Stock
Most people outside of Silicon Valley don’t see Netflix, Inc. (NASDAQ:NFLX), or NFLX stock for that matter, as the marvel it truly is. The company is so much more than just a streaming service…
It is a pioneer. That may sound grandiose, but what Netflix achieved was truly revolutionary. Silicon Valley hasn’t been the same since.
What makes me so sure is that Netflix has a long list of copycats. And we all know imitation is the greatest marker of success.
As someone who keeps a close eye on Silicon Valley, I can tell you it is much better off than before Netflix came around. The company solved one of the oldest problems in tech.
Just think about the dotcom bubble in the late 1990s. Investors had finally grasped the enduring power of the Internet. This wasn’t a passing fad. The Internet was here to stay and everyone knew it would change the world—they just weren’t sure how.
Money flowed to Internet stocks with reckless abandon. Companies with no idea how to make money were getting more cash than they knew what to do with.
It was irresponsible and unsustainable. Ultimately, the whole stock market was brought low when these Internet stocks came crashing down. Dark days followed.
Eventually, there was a resurgence in Silicon Valley. Companies like Alphabet Inc (formerly Google) and Facebook Inc. proved there was money in online advertising. Heck, Alphabet is the biggest company in the world right now.
That being said, not all companies can live off of advertising revenues. They needed a different guidebook to survival, and Netflix provided that to them.
Think about it: I pay a monthly subscription fee to Netflix and in exchange, I get a huge selection of movies and television shows. Better still, I get to watch them on my smartphone and tablet whenever I want.
The added mobility is useful for when I’m cooking or lying in bed, but it’s not what originally attracted me to Netflix. I signed up because the selection of content was worth paying for.
From my perspective, it was a pretty sweet deal. And it worked out for Netflix too, because tens of millions of people jumped at the offer. They, too, thought a Netflix subscription made sense.
That’s the secret Netflix gave to Silicon Valley. It showed that if a company provides a valuable enough service, customers will pay a subscription fee. Getting money from advertisers was one way of doing business, but Netflix found a much better alternative.
By collecting subscriptions from customers, the company now had to keep those customers happy. Its incentives are centered on the user experience.
Now the company has a broad base of customers, billions in revenue, and a deep catalog of original content. Is it any surprise that NFLX stock has surged 2,157% during its lifetime as a public company?
However, the stock has been slipping in the last six months. The company’s recent earnings report pushed it down even further, mainly because of lower-than-expected international subscriptions. (Source: “Netflix shares drop 12% after lowering estimates for new international subscriptions,” LA Times, May 12, 2016.)
After all, Netflix recently expanded to 130 countries, so there were very high expectations. But here are a few things to keep in mind before you bail on NFLX stock:
- It’s the Language, Stupid: There is very little non-English content on Netflix right now. The company is working with local partners to expand its selection, but that transition was never going to happen overnight. Have a little patience. The international subscribers will flock to Netflix once there is content they can enjoy.
- Netflix Brought the Bacon: Netflix brought in $28.0 million in profit for the quarter. That’s $0.06 per share or, to put it another way, double what analysts were expecting. (Source: Ibid.)
- Eyeballs Are Everything: On top of everything else, Netflix crushed market estimates for new subscribers in the U.S. Wall Street thought the company would only add 1.82 million new subscribers, but Netflix drew in an additional 2.23 million Americans. (Source: Ibid.)
But does Netflix get credit for any of those things? Not so much. Fewer-than-expected foreign additions were enough to spook the market. Personally, I think NFLX stock is destined to rebound and hit new highs.
It simply has too strong a business and investors will remember that in time.