NFLX Stock – How Much is Hulu Eating into Netflix?

Netflix Inc. (NFLX) is trending down today on reports that movies provided in syndication by Epix — including Hunger Games: Catching Fire and World War Z, among others — will be leaving the company’s streaming video catalog.

NFLX Stock - How Much is Hulu Eating into Netflix?It’s a gross oversimplification to say that Netflix stock is declining simply because it’s losing a Jennifer Lawrence movie, however. The bigger implications are that Netflix has been moving away from higher-profile films and more towards original programming like critically acclaimed shows House of Cards and Orange is the New Black.

NFLX stock holders should also be aware of the meteoric run lately, with Netflix up over 130% year-to-date vs. a down market. And longer term, NFLX is up about 800% since early 2013.

Of course, a red-hot run like that can’t continue forever … So is the softness today really an indictment of Netflix content strategies, or just a natural pullback in Netflix stock after this rally?

NFLX Stock Has Serious Growth

Netflix stock is admittedly a bit frothy. Even among high-growth tech stocks, its forward price-to-earnings ratio of about 384 is eye popping, and anyone who has looked at a multi-year chart of Netflix should be keenly aware of how volatility is the norm.

But over time, NFLX has undoubtedly seen more big moves up than down — and that’s a testament to its consistent growth and strong long-term prospects in the fast-growing world of streaming video.

Here are the highlights, with all figures as of June 30, based on the latest Netflix earnings report.

  • User Growth: With 65.5 million users worldwide, Netflix users are up 74% over the same period in 2013 and 31% over 2014.
  • Massive Scale: Not only is that growth impressive, but it’s almost three times the 22.3 million video customers served by Comcast (CMCSA) as of June 30!
  • Margins: For fiscal 2013, the domestic streaming business of Netflix operating at a 22.6% margin. In 2014, that was 27.3%. And across the first six months of 2015, domestic streaming operated at a margin of 32.4%. Yes, international operations are still operating at a loss as NFLX builds out its business, but the anchor of a nicely profitable U.S. business is huge for Netflix stock holders and shows future potential for profitability abroad.

There are obviously concerns for any stock that has run up as quickly as Netflix. But growth is real at this company.

Who Cares About Netflix Ditching Epix?

Taken amid this backdrop, it’s hard to think that the loss of Epix will mean significant disruptions or result in the loss of any subscribers.

First, Netflix has a simply massive catalog of movies. Also, the pivot away from pricey reruns and towards its own original programming is not just a gambit to offer up inferior shows and save costs; shows including BoJack Horseman and Daredevil may not be as well known as House of Cards but have won over plenty of fans.

But most importantly, at this stage in the game it is crucial for Netflix to not live in a land of infinite resources and do-everything programming. Epix clearly wanted more money than NFLX was prepared to offer, and the company didn’t give chase when terms couldn’t be agreed upon.

“While many of these movies are popular, they are also widely available on cable and other subscription platforms at the same time as they are on Netflix,” the company’s chief content officer wrote on its corporate blog Sunday. “Through our original films and some innovative licensing arrangements with the movie studios, we are aiming to build a better movie experience for you.”

NFLX then went on to tout original flicks it has in the works, including a series of comedy films from Adam Sandler and a made-for-Netflix series that continues the legacy of action megahit Crouching Tiger, Hidden Dragon.

To me, this is proof positive that Netflix is managing its “team” of movies like a good NFL coach — selecting role players, paying a premium for what you think you need and parting ways with free agents who are too pricey for your long-term strategy of winning.

The bottom line is that no company on the planet will ever be able to offer every movie, and even if competitors like Amazon (AMZN) or Hulu eventually build a deeper catalog than Netflix, the cost of such a video library may make it cost prohibitive for consumers.

Yes, Netflix stock is down today — but if you think it’s because Netflix knows how to say “no” to Epix, then you don’t see the big picture.

Maybe Netflix will fall short with its original programming, and maybe Hulu will leverage the new Epix content in a way that allows it to close the gap with NFLX.

But in my book, Netflix is making all the right moves to stay dominant in the streaming game … even if that means letting some popular films go.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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