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Buy Netflix Stock Because NFLX Continues to Win the Content Wars

When it comes to Netflix (NASDAQ:NFLX) stock, I have one really simple saying: follow the content.

The rationale behind this saying is also simple. Content is the core driver of the value of NFLX stock. The company has already figured out the best way to reach consumers. Specifically, NFLX has deployed a direct streaming service that is capable of streaming across multiple devices and has download and watch-later capability. Now NFLX only has to worry about content.

Despite Disney+ risk, Netflix stock looks strong heading into Q1

Source: Shutterstock

When the content is good, old subscribers will stay on the platform because they want to keep watching the content,  and many new subscribers will sign up because they want to start watching the content. As a result,  Netflix’s total sub base will grow. Further, the better the content, the more consumers will pay for the platform. Consequently, NFLX can raise prices, leading to better unit economics, more revenue, and higher margins and profits.

The opposite is true, too. When the content is bad, old subscribers will be more willing to switch to other streaming platforms because they won’t want to keep watching the content. The service  won’t attract new subscribers because they won’t want to start watching the content. Netflix’s subscriber base may shrink. Further, the worse the content, the less valuable consumers deem the platform. Consequently, in a worst-case scenario, Netflix would have to cut its prices. That leads to worse unit economics, less revenue, and lower margins and profits.

Overall, then, when it comes to Netflix stock, it’s all about content. Fortunately for those who are bullish on Netflix stock, NFLX is winning the content wars, and it looks poised to keep winning the content wars for the foreseeable future,. As a result, NFLX stock should keep rallying over the next several years.

Netflix Is Winning the Content Wars Today

Every few months, I do this exact type of article where I look at how consumers perceive Netflix’s original content versus content from other sources. I always conclude that Netflix’s original content is perceived as better by consumers. The same is true this time around.

Most recently, NFLX launched When They See Us, a biographic drama series about five black teenagers who were convicted of a rape they didn’t commit. That series was rated 9.1 out of 10 on IMDb. In a totally different genre, Netflix recently launched the first season of Dead to Me, an offbeat “dramedy” which follows the relationship between two strong women. That show got an 8.2 rating on IMDb.

Crime documentary series Conversations with a Killer: The Ted Bundy Tapes, received a strong 7.8 rating on IMDbThe Society, an apocalypse thriller, scored a 7.1 rating on IMDb. Science fiction superhero-themed series The Umbrella Academy was rated 8.1 out of ten.

Across the board, Netflix’s original content over the past few weeks has been perceived as very good by consumers,repeating the pattern of the past several years. Importantly, all the shows and movies referenced above are original works. They aren’t recycled content or second seasons. They are all fresh, new, and exciting concepts.

Let’s compare Netflix’s recent content to that of Disney (NYSE:DIS), which is widely seen as Netflix’s biggest potential competitor. Disney’s three most recent major motion picture releases are AladdinAvengers: Endgame, and Dumbo. Two of those are remakes. The third is the final installment in a decade long series. Further, the average IMDb score among those three movies is around 7.5, which is below the scores obtained by four of the five Netflix originals listed above.

Netflix Will Continue to Win the Content Wars

NFLx is winning the content wars today. It’s producing more and better content than anyone else. But, more importantly, Netflix will continue to win the content wars for the foreseeable future.

The quality of content production is primarily influenced by two components. The first component is data. The more data a company has on consumers, the more it knows what they want to watch, and the more it can tailor content to their interests. The second component is resources. The more resources a company has, the more resources it can pour into content production.

Netflix has the most the data and  the most resources of any content producer. Thus, it’s well-positioned to continue winning the content wars for the foreseeable future.

On the data front, Netflix has nearly 150 million subscribers, in the U.S. and overseas, who are watching shows and movies on its platform every week, if not every day. That means Netflix has dynamic, real-time, and contextualized data on the viewing preferences of 150 million households globally. Nobody else has that data. Thus, Netflix can use its data-driven production method to create more relevant content than anyone else in the world.

On the resources front, Netflix can justify spending a great deal  on original content much easier than other platforms. Other streaming platforms have a few million subscribers. Thus, when they produce original content,  it will be watched by a few million subscribers, at most. Companies can’t justify spending large amounts on original content when the return potential is so small.

But Netflix has 150 million subscribers. Thus, when it produces original content, its return potential is 150 million watchers. It can justify huge spending on original content when the return potential is that high.

Because of Netflix’s data and resource advantages, it should continue to win the content wars for a long time.

The Bottom Line on NFLX Stock

When it comes to Netflix stock, follow the content. Buy NFLX stock when NFLX’s content is good. Sell NFLX stock when NFLX’s  content isn’t good.

Netflix is winning the content wars right now, producing a plethora of really good and diverse original series and movies. Thus, next quarter’s subscriber numbers should impress the Street, and that will push Netflix stock higher.

At the same time, Netflix is poised to keep winning the content wars for the foreseeable future because of its huge data and resource advantages. Thus, its subscriber numbers will continue to be impressive for the foreseeable future, and its consistently higher than expected subscriber numbers  will keep Netflix stock on a steady and healthy upward trend.

As of this writing, Luke Lango was long NFLX and DIS.

Article printed from InvestorPlace Media, https://investorplace.com/2019/06/buy-netflix-stock-win-content-wars/.

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