It felt like a riveting narrative straight out of a Netflix-produced series…
The year was 2022, and the battleground of the streaming wars was ablaze. The underdog, Netflix (NFLX), found itself besieged by the likes of Disney+ and other streaming services launched by venerable Hollywood giants.
Amidst this onslaught, Reed Hastings, Netflix’s co-founder, rolled out a series of countermeasures to fend off the competition. These strategies ranged from tackling password-sharing amongst customers to even contemplating the notion of advertising.
Despite these efforts, Netflix’s stock took a plunge. Naysayers from the traditional Hollywood studios gleefully exclaimed, “We told you so,” as the anticipated downfall seemed imminent.
However, in a dramatic twist, the expected downfall never materialized. Instead, this juncture marked the initiation of a strategic pivot that extended Netflix’s lead over its conventional entertainment counterparts, who were struggling to turn profits despite pouring billions into the streaming arena.
The tangible outcome is evident in the stock performances. Netflix’s shares have soared by 85.7% over the past year. Conversely, Warner Bros Discovery (WBD) has plummeted by 26.5%, Paramount Global (PARA) by 17.8%, Comcast (CMCSA) by 10%, while Walt Disney (DIS) has only seen a meager 14.4% increase.
Netflix’s Strategic Triumph
The triumph of Netflix’s strategy is further underscored by its financial results.
Initially met with skepticism on Wall Street, the crackdown on password-sharing launched in select markets such as Chile, Costa Rica, and Peru in early 2022 turned out to be a masterstroke.
Contrary to fears of customer attrition, the crackdown catalyzed Netflix’s growth for over a year, propelling total subscribers to 277.6 million in the latest quarter, signifying a 16.5% surge from the previous year.
Since introducing the domestic password crackdown in May 2023, Netflix has added a staggering 45 million paying subscribers. This meteoric rise in the subscriber base is a primary factor behind the stock’s remarkable surge of over 114%, propelling it to new record highs.
Even today, almost five years since the advent of Disney+ ignited the streaming rivalry, Netflix retains its supremacy in terms of subscribers and viewership time. In July, it commanded approximately 8.4% of U.S. screen time, eclipsing its closest competitor DIS, which managed 4.8% with Disney+ and Hulu combined.
By contrast, other streaming platforms affiliated with Hollywood studios like Warner Bros Discovery’s Max, Comcast’s Peacock, and Paramount+ only captured less than 2% of viewing hours.
The Next Chapter for Netflix
Reflecting on Netflix’s successful strides since 2022, the company’s expansion initiatives are noteworthy. From pioneering an ad business, investing in the burgeoning realm of video games, to enhancing live experiences around hit shows like Bridgerton, Squid Game, and Stranger Things, Netflix has been on a bold trajectory.
While the surge stemming from the password-sharing crackdown is poised to plateau, the next growth phase for Netflix could emanate from its burgeoning advertising segment.
However, achieving meaningful revenue from advertising will necessitate time. Collaborating with Microsoft (MSFT) for digital ad delivery and unveiling a list of top 10 shows for targeted advertising were initial steps taken by Netflix.
Yet, Netflix faces competition not from traditional Hollywood studios but from a formidable foe in Amazon (AMZN) through its Prime Video service. Amazon’s foray into streaming advertising, accompanied by aggressive pricing strategies, prompted Netflix to recalibrate its approach, transitioning from Microsoft to an in-house advertising platform.
In a bid to broaden its horizons, Netflix is making strategic inroads into streaming live events. This encompasses airing two NFL games on Christmas Day – Steelers versus Chiefs and Ravens versus Texans.
Moreover, Netflix inked a monumental $5 billion, 10-year agreement with World Wrestling Entertainment for its weekly Raw program, the largest venture into streaming live events to date. This move not only enriches the advertising domain for Netflix but also positions the company favorably for potential collaborations with major sports leagues down the road.
Netflix’s progressive maneuvers into live-event sports programming are well-founded. Live events hold heightened appeal for advertisers compared to standard scripted content, with the NFL reigning supreme in the American sports broadcasting sector.
Therefore, bolstered by its market dominance in video streaming, Netflix appears primed to achieve mid-teen revenue growth and expanded operating margins.
Considering the impressive trajectory and promising ventures of Netflix, investing in NFLX stock below $717, ideally below $700 during market retreats, seems prudent.
