Flying under the radar yesterday was a report from Variety that detailed a technology Netflix, Inc. (NFLX) has been working on for years. Specifically, the tech allows users to stream Netflix videos while using less data — as much as 20% less — while actually improving quality.
This means that NFLX, which is already responsible for 37% of all internet traffic in North America, should reduce its bandwidth footprint, something that not just consumers, but also cable companies such as Comcast (CMCSA) and Time Warner Cable (TWC), will benefit from.
NFLX stock is already the top performer in the S&P 500 this year, and shares are up another 1% today, bringing the year’s total gains to almost 150%.
Recoding Thousands of Titles
While it’s a huge technological leap for Netflix, it’s not like the company can just flip a switch and, poof! — the problem’s fixed. No, every title must be re-encoded on an individual basis, judging on the bandwidth demands of each video. It sounds tedious, but it’s how NFLX will get the most bang for its buck.
The Variety article gives an example of how the new strategy impacts viewers specifically:
“This allows the company to stream visually simple videos like “My Little Pony” in a 1080p resolution with a bitrate of just 1.5 Mbps. In other words: Even someone with a very slow broadband or mobile internet connection can watch the animated show in full HD quality under the new approach. Previously, the same consumer would have just been able to watch the show with a resolution of 720*480, and still used more data.”
NFLX is shooting to have 1,000 titles re-encoded by the holidays, and re-encode its entire catalog by the end of 2016.
While it’s objectively great news to NFLX stock holders that the quality of the service will be improving while data usage actually declines, that’s just the beginning.
This has implications for Netflix’s ambitious worldwide expansion goals; the company is aiming to bring its service to hundreds of countries across the globe by the end of 2016, and this is where a lot of the NFLX stock price is baked in. If international expansion doesn’t go so well, you can be sure the Netflix stock price will flounder.
Using this strategy of re-encoding, however, should really help its international efforts, because many areas in India and Africa — with high population density and millions of potential customers — suffer from slower Internet speeds.
Now, with NFLX requiring much slower speeds to deliver the same quality content or better, international expansion efforts are far more likely to catch on quickly.
While a forward price-to-earnings ratio of 472 is still too rich for my blood, I applaud Netflix for working to develop this technology, and I think it will be extremely beneficial to the company’s growth prospects going forward.
For my money, a much better high-growth stock with gaudy multiples is Amazon.com (AMZN), which owns Amazon Web Services, a cloud services company that is actually in charge of helping Netflix re-encode its entire catalog.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
