YouTube Red Shouldn’t Scare NFLX Stock Investors
Big news hit Netflix, Inc. (NASDAQ:NFLX) on Thursday as Alphabet Inc (NASDAQ:GOOG), the parent company of Google, announced it would be entering the TV and movie streaming industry, in which Netflix is the current dominant force. NFLX stock has been one of the top performers on the market this year, but could its rally finally be over?
When Google first launched “YouTube Red,” it was thought to be only an ad-free subscription-based service, but questions arose in rational minds as to why Google would make a move like that and put its profitable video-streaming business in jeopardy. After all, it’s the ads that are the biggest revenue pullers for its YouTube platform. Blocking ads meant angering advertisers. Plus, how big a subscriber base could YouTube achieve for $9.99 a month in return for simply offering users ad-free videos? Obviously, something bigger was brewing up at the San Bruno headquarters.
As it turns out, Alphabet’s YouTube has plans to start a full-blown TV show and movie streaming service on YouTube Red. YouTube executives, many of whom happen to have roots at Netflix, are already reaching out to Hollywood studios to start licensing content for YouTube Red.
It is understandable that Google is expanding its hold over the video streaming industry, which is expected to make up about two-thirds of the mobile data traffic by 2021. Ericsson’s latest report predicts that YouTube will dominate this space with 70% of the total traffic. Netflix is expected to be the next big puller of traffic, but at only 20%. (Source: “Ericsson Mobility Report,” Ericsson, November 17, 2015.)
This Could Save Netflix from YouTube
YouTube Red may make an attempt to imitate Netflix, but will it be successful enough to take over the market? Netflix has little to worry about, because YouTube isn’t going to be its first competitor. Two other players, Hulu LLC and Amazon.com, Inc.’s “Prime Video” are already active players in this space. YouTube’s free platform may have a much bigger viewership, but that bears no guarantee that the web site will be able to convert the majority of its free userbase to a premium subscriber base.
Two factors continue to grant Netflix the top position on the leaderboard. The first is its brand name’s dominant recognition, both locally and internationally, and the second is its originality and scope. Netflix’s subscriber base has surpassed 65 million this year; Hulu and Amazon Prime cannot beat that number, even jointly. (Source: “Netflix Hits 65 Million Subscribers,” Statista, July 16, 2015.). The company has enjoyed stellar reception in all the countries where it has recently launched its service, including Australia, New Zealand, and Japan, and it is now eying India and China.
Also, most of the popular content is already licensed to Netflix. The service boasts the biggest library of the most popular TV shows and movies. Additionally, Netflix is producing popular original content for its users. Netflix’s House of Cards, Narcos, and Orange Is the New Black have all been massive hits. YouTube will have a long way to go to achieve—let alone beat—that.
The Bottom Line on NFLX Stock
NFLX stock enjoys a great liking on Wall Street and has been one of the best performers on the market. The stock is up more than 158% year-to-date and more than 363% in the last five years, far beating GOOG stock’s performance.
It remains to be seen how big of a reception the new YouTube Red will have once the service is rolled out in its entirety. Inarguably, Google’s latest move may claw away at some of Netflix’s subscriber base, but rest assured that the latter will still remain an industry leader going forward.
The bottom line: I’m still bullish on Netflix stock.