Does The Success Of “Stranger Things” Prove That Netflix Is On Firm Ground?
While Netflix‘s (NASDAQ:NFLX) Q2 2016 results were disappointing, with its subscriber growth falling significantly short of its guidance, the company’s focus on original content is proving to be a winner. It’s new after show “Stranger Things” was named the most popular digital original series in the U.S. for the week of July 17 to 23 by Parrot Analytics. This show in the first week after its release has become more popular than the company’s immensely popular title “Orange is the New Black” with over three times the demand. As competition in the streaming media becomes intense, Netflix is relying on its ability to create original content to retain and grow subscribers. According to our estimates, the company’s U.S. streaming segment accounts for nearly 70% of its valuation and growth in subscribers is a key driver for this segment. While Amazon and YouTube Red are looking to create a dent in Netflix’s market share, the popularity and success of its shows will ensure that Netflix continues to retain and grow subscribers in the U.S. for the next few years, in our view.
See our complete analysis for Netflix
Popular, Exclusive, Original Content Key Differentiator
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While new players are crowding the OTT (over the top content) market, Netflix’s continued focus on exclusive and original content has been its key differentiator. The resounding success of “Stranger Things” proves that this focus is working in the company’s favour. While creating original content involves high cost and will put pressure on Netflix’s margins in the short term, this strategy should ensure subscriber growth and justify the increase in subscription rates in future. We believe in the long term this strategy can drive revenues and profitability for the company.
According to our estimates, Netflix’s U.S. streaming subscribers will grow steadily from around 49 million in 2016 to nearly 60 million by the end of our forecast period. We believe its focus on original content is one of the key drivers of this growth.
We expect the company’s domestic streaming contribution margin also to grow moderately from around 37% in 2016 to 42% by the end of our forecast period.
While increase in content costs can put a pressure on these margins, operating leverage and reduced marketing costs can help the company achieve higher margins in the long term.
The success of Stranger Things confirms that an investment in content is working in Netflix’s favour and giving it a competitive edge. The company is already immensely popular and while raising subscription rates impacted subscriber growth in the recent quarter, interesting content can keep subscribers hooked to its platform. We believe Netflix’s model is sustainable and should provide growth opportunities in the longer term.
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