Netflix, Inc. (NFLX): The Hidden Upside in Netflix Stock

Netflix, Inc. (NFLX) usually makes money by licensing content from other television and movie studios and selling a subscription to that content. But it’s flipping the script on Netflix stock investors. The online video streaming service has agreed to license its original content to a traditional cable network.

Netflix stock NFLX

Netflix and Univision announced a deal to air the first seasons of Narcos and Club de Cuervos on its networks. While it’s not a huge revenue driver for Netflix stock — The Wall Street Journal reports Univision is paying a low fee for broadcast rights — NFLX will receive promotion of its original content to one of the last markets in America where it’s underperforming.

Additionally, this could lead a path to unforeseen revenue or a marketing campaign that actually makes money instead of expending it.

Relief for Netflix Stock

NFLX’s marketing expense grew 36% in 2015 as it expanded the service internationally. At the beginning of 2016, Netflix launched its service in more than 130 new countries, bringing it to every major market outside of China. This means marketing expenses are likely to continue to rise longer-term. In fact, during the first quarter, international marketing expenses increased 20% year over year. 

While Netflix’s original content can be a strong driver to get people to sign up for its service, it has thus far been aimed largely at English-speaking audiences. With plans for a global expansion in place, Netflix started producing programming in other languages like the aforementioned Narcos as well as French political drama Marseille.

NFLX can make deals with broadcasters in countries that speak those languages as a way to get the word out about its originals to international customers. In fact, it has reportedly made a deal with French TV network TF1 to broadcast Marseille.

These deals will lower the burden on marketing expenses for Netflix stock, which has risen substantially over the last few years. Netflix isn’t viewing these deals as a source of revenue in themselves for now. It may find opportunities to license second-runs of its originals as a revenue opportunity in the future, particularly in countries with low broadband internet penetration and China.

While NFLX isn’t streaming in China, it did release its Crouching Tiger, Hidden Dragon sequel in theaters in the country.

Netflix typically spends more on its originals than the actual cost of production. That’s because it’s not actually producing the content itself — just as most networks buy content from other studios as well. On its newer originals, NFLX demands global streaming rights for every production it buys, and the asking price is typically 120% to 150% of the actual cost of production.

Netflix is striking deals to co-produce original content with local networks. When it announced that it would syndicate its shows with Univision, it also announced a co-production with the network for a show called El Chapo. The show will first air on Unimas in the United States, but Netflix will retain exclusive global streaming rights for the show, including in all the Spanish-speaking countries it operates.

NFLX content costs have also gone up dramatically. Last year, Netflix spent $4.75 billion on content, a 40% increase from the year before. Its total content liabilities increased 30% to $4.8 billion. The company expects to spend $6 billion on content this year. Any way to slow down that cost of content should benefit Netflix stock.

So, not only do these syndication deals have the potential to drive new subscribers to Netflix, but they could also reduce the amount the company spends on content. Down the road, it may even become a significant source of revenue. How about that for hidden upside?

As of this writing, Adam Levy did not hold a position in any of the aforementioned securities.

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