Out of the White House, and on to Netflix, Inc. (NASDAQ:NFLX).
That is the path that former President Barrack Obama and wife Michelle Obama are following as the two just signed a multi-year agreement to produce original content for Netflix.
As of today, it remains unclear exactly what type of original content the Obamas will produce for Netflix. But for Netflix stock investors, that really isn’t important. What’s important is that Netflix continues to successfully execute on its original content strategy, and build upon early successes to create what increasingly looks like one of, if not the, most valuable content portfolio in the world.
As this content portfolio grows, so too will Netflix’s user base and average subscription prices. As those head higher, so too will Netflix stock.
Because of this, Netflix signing the Obamas simply gives more ammunition to the ever-strengthening bull thesis supporting the stock.
Here’s a deeper look:
Obamas Provide a Positive Buzz Factor
President Barrack Obama left the White House with a 59% approval rating, which is on the high end of his two-term presidency. Since then, his retroactive job approval rating has risen to 63%, which is among the highest of any former U.S. president. Meanwhile, Obama remains the most admired man in the world, while his wife is the second most admired woman in the world, according to a Gallup poll.
Clearly, the Obamas’ are popular, and in their “retirement” they are only becoming more beloved by the public.
From this perspective, signing the Obamas to a multi-year production deal will create a positive buzz for Netflix. The logic here is pretty simple: People like the Obamas. They hear that Netflix has signed the Obamas. They excitedly await the first Obama production on Netflix. That excitement should lead to less user churn, more user growth and a higher rate of free-to-paid conversions.
All in all, then, the Obamas-signing provides a material near-term tailwind for Netflix stock. If the content is good, then Netflix will be able to turn that near-term tailwind into a powerful long-term tailwind.
Original Content Continues to Impress
But Netflix doesn’t need the Obama content to be that good.
Why? Because everywhere else, Netflix’s original content continues to impress.
Season 2 of 13 Reasons Why just debuted. While critic reviews have been hit-or-miss based on the inherent controversy of the show, user ratings have been quite high. Season 1 episodes scored between 8 and 9 on IMDb, while Season 2 episodes have scored between 7 and 8 — not much of a fall-off. Meanwhile, on Rotten Tomatoes, user-approval rating dropped from 80% in Season 1 to 70% in Season 2.
Thus, while there is a clear step down from Season 1 to Season 2, Season 2 ratings are still high. Meanwhile, other new Netflix originals like On My Block, Safe, Evil Genius, and Money Heist all have scores on IMDb of 7 and up and user-approval ratings on Rotten Tomatoes of 70% and up.
Clearly, across the board, Netflix originals continue to impress audiences. As long as this remains the case, Netflix will grow its user base by a substantial amount.
Netflix Has Lots of Room to Grow
Netflix only has 125 million global subscribers. While that may seem like a lot, I say “only” because there are about 1.6 billion internet households in the world. Thus, Netflix is tapping into less than 10% of its global addressable market.
Therefore, so long as Netflix keeps winning consumers over with its robust original content slate and on-demand functionality, Netflix’s user base will keep growing at a rapid rate until there are several hundred million people on Netflix.
Moreover, Netflix only costs $8 to $14 per month. That is way less than cable, which runs about $100 per month. Thus, Netflix has a lot of wiggle room to hike prices before anyone really even flinches. If the original content slate grows more robust over time (as it should), that gives Netflix more ability to hike prices without churn.
At the end of the day, it all comes back to original content with Netflix stock. Global user growth? Hinges on the quality of international original content. Price hikes? Hinges on the quality and quantity of global original content. Netflix stock price? Hinges on both user growth and price hikes, so it really is just a function of the quality and quantity of original content.
Bottom Line on Netflix Stock
In and of itself, Netflix signing the Obamas to a multi-year agreement isn’t a game-changer. But the move is yet another home run for the company’s original content strategy, and that strategy is essentially the entire driving force of NFLX stock.
Consequently, the Obamas signing is a big deal for NFLX stock. It is simply another reason to buy this stock for the long term as the company’s original content portfolio grows in both size and value.
As of this writing, Luke Lango was long NFLX.
