On December 22, Netflix, Inc. (NASDAQ:NFLX) released its first blockbuster-type movie, Bright. And at least according to critics, the $90 million Will Smith vehicle is an outright flop. It doesn’t bode well for NFLX stock.
Indiewire called it “the worst movie of 2017“, a “dull and painfully derivative ordeal.” CNN.com reviewer Brian Lowry termed Bright “a bloated, expensive mess.” On Rotten Tomatoes, the movie has just a 28% positive rating from critics.
The apparent misfire when it comes to Bright would seem to be a potential negative for Netflix stock. As I wrote back in October, the company’s dominance in the content space is eroding.
Tom Taulli correctly pointed out last week that the recent deal between Walt Disney Co (NYSE:DIS) and Twenty-First Century Fox Inc (NASDAQ:FOX,NASDAQ:FOXA) aids two competitors, between the added content for Disney’s streaming service and Disney’s coming majority stake in Hulu.
As such, Netflix needs to transition from being a simple content distributor to a content creator. The company has said it will spend as much as $8 billion on content in 2018 alone as part of that effort. Spending $90 million on a miss like Bright would seem to bode poorly for that plan and for NFLX stock.
Of course, there’s another way to look at Bright. While critics have panned the movie, audiences appear more than happy. Rotten Tomatoes might show a 28% approval rating from critics, but 88% of audience reviews are positive.
Nielsen data suggests that 11 million people still watched the movie in its debut weekend. That hardly sounds like a flop, particularly given the figure doesn’t include international viewing.
Looking forward, then, Bright seems a good barometer for how an investor views NFLX stock. If it’s a success, then Netflix stock probably has more upside. If not, it’s a warning of things to come.
Why Bright Proves the Bull Case for NFLX Stock
There are a couple of reasons why Bright could be seen as bullish for NFLX, even with the stock back above $200 on Tuesday morning thanks to an analyst upgrade.
The first is the sheer number of viewers, again, solely in the U.S., and only in the first weekend. Eleven million viewers in three days in a theater, at an $8-9 ticket price, would suggest a $90-$100 million opening weekend— the tenth or eleventh biggest opening of 2017. Only Netflix’s reach and scale can drive that kind of viewership.
No other platform has the same ability to drive views by advertising on Roku Inc (NASDAQ:ROKU) devices, or more importantly targeting subscribers via its data-rich algorithms.
The second is that Bright appears set to become a franchise of its own. Netflix already has ordered a sequel to Bright. And while some investors fretted that Disney was taking Pixar and Marvel franchises away from the platform, Bright might show that Netflix can create profitable ‘universes’ of its own.
Notably, in both cases, Netflix doesn’t necessarily have to create a great movie to reap its rewards. It’s Amazon.com, Inc. (NASDAQ:AMZN) that’s created the critically reviewed titles, among them Manchester by the Sea, which won two Oscars last year, and this year’s The Big Sick. But it’s Netflix that’s seeing the blockbuster-type viewing, not its rival.
Why Bright Raises Concerns for NFLX Stock
The most obvious concern is that Netflix spent $90 million for a movie that isn’t necessarily all that good. Audience score aside, even those ratings acknowledge some flaws in the movie. And while 11 million viewers sounds like a big number, it’s much easier to drive 11 million viewings at home than in a theater, particularly with Netflix’s ability to steer subscribers to the film.
More broadly, there’s the question of whether this new model for Netflix really can be profitable. The old model for Netflix—simply streaming content from elsewhere and essentially splitting the proceeds in one form or another—was much simpler and much safer.
The need to develop franchises of its own adds a layer of risk to the process. And while Netflix’s personalized marketing ( the company even changed the thumbnail picture different accounts saw ahead of the release) gives it an edge, it still has to make quality product.
Bright isn’t necessarily that. And it may signify that Netflix simply isn’t going to be as good at content as Disney and its Pixar and Marvel units, or even as good as Amazon. That could be a problem for growth, and for Netflix’s ability to take pricing going forward.
Choose Your Side
A single movie doesn’t prove either the bullish or bearish arguments for NFLX stock. But I worried last month that NFLX stock was headed for a stumble in 2018, and even with Tuesday’s gains, I still worry that’s the case.
Netflix is going to be a content giant, and a streaming giant, for years to come. But the question remains to what extent that already is priced in and how many giants Netflix will have to battle along the way.
From here, Bright doesn’t seem to help the case all that much, and at the least doesn’t show that Netflix, yet, has the chops to battle more experienced content creators in the blockbuster realm.
To be sure, that may change in the future. For NFLX stock to keep rising, it likely will have to.
As of this writing, Vince Martin has no positions in any securities mentioned.