Netflix, Inc. (NASDAQ:NFLX) has already revolutionized the television industry by forcing its rivals to confront the swing towards online streaming. But Netflix stock still has room to run as the industry sorts out a fair price for streaming memberships. The end result could be a $200.00 price tag on NFLX stock.
Such a bold target may sound absurd given that Netflix stock trades at more than 288 times its earnings, but hear me out. The market for online content is still in its infancy, meaning Netflix hasn’t had the time to fully mature.
We’re only just starting to see competition from Hulu LLC and Amazon.com, Inc., so the effects of increased competition remain a mystery. Netflix stock benefitted from its monopoly over streaming, suggesting NFLX stock will crash once they lose market share. At least that’s what the skeptics are saying. (Source: “Hulu Steps Up Its Fight Against Netflix,” Wall Street Journal, June 16, 2015.)
But that line of reasoning misses some important tailwinds for Netflix stock. For instance, what happens as the baby boomers dwindle away, and the millennial generation occupies a larger percentage of the viewing public?
Netflix stock grew in value based on the perception of online streaming. Millennials are the digital native generation, meaning most of them, if not all, use online streaming as a way of life. No one needs to convince them to switch from cable to streaming.
Even if competition increases, NFLX stock is the market leader. What is the rationale for assuming Netflix will lose ground in an industry that depends on bargaining power?
Netflix Stock is Poised for Huge Growth
In October 2015, NFLX stock got a little bump as investors heard Netflix will charge an extra dollar for its most popular subscription. Considering how wide the base of users is, Netflix stockholders correctly understood the possibility for extra revenue for NFLX stock.
The entire argument for shareholders to hold on to NFLX stock was the great shift towards original content. Netflix argued that by investing more in original content, customers would feel a greater sense of loyalty to Netflix stock.
Also, the greater sense of commitment would translate to higher prices for NFLX stock. If customers get the sense that Netflix will provide them with a viewing experience they can’t get elsewhere, then they are less likely to switch. It’s the “HBO strategy.”
People are willing to pay for premium cable channels like HBO, because their content is just that good: think The Sopranos, Entourage, and Game of Thrones. Netflix is copying that strategy which makes me think NFLX stock could easily double in the next few years. The stock won’t crash when rivals step up their game because the market will be much larger than it is today and there will be space for more than one firm.
Hulu bought the rights to Seinfeld for roughly $700,000 per episode which is a valuable property, but that doesn’t really buy loyalty to the Hulubrand; subscriptions will be based off the loyalty to Seinfeld. It’s a short-term strategy to pull in an audience. (Source: “Hulu strikes ‘Seinfeld’ streaming deal — at $700K per episode,” New York Post, October 31, 2015.)
After pulling in an audience, Hulu would need some way to retain that audience. Their valuation would face the same challenges as Netflix stock, forcing Hulu to adopt the same original content strategy as Netflix.
This process of drawing in an audience and then securing their loyalty with original content looks like it will be the first two stages of a life cycle arc for online streaming companies. NFLX stock has been punished for shallower margins as they pursue this model, but the market will become more lenient as the model grows more familiar.
And since Netflix stock is the pioneer of online streaming, it has a massive head start.
Here’s the Bottom Line on Netflix Stock
So to sum up, Netflix stock has three important sources of growth. One is the generational transition towards online streaming and another is the success of original content in driving higher NFLX stock prices.
And finally, not to mention most obviously, Netflix has the power of incumbency. They were pioneers of this new generation.
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