How to Trade the Next Act for Netflix Stock

It almost seemed like a plot line from a Netflix-produced drama…

It was the spring of 2022, and guns were blazing in the streaming wars. The upstart company, Netflix NFLX, was under heavy fire from Disney+ and other services launched by the established Hollywood studios.

The company’s co-founder, Reed Hastings, came up with a number of initiatives to hold off the onslaught from the companies gunning for Netflix. These included cracking down on customers who shared their passwords with friends or relatives, and even ~advertising~ was on the table.

Nevertheless, the stock plunged. Everyone from the traditional Hollywood studios was saying “Told ya so,” as the comeuppance the old guard had long said would happen was happening.

However, in a major plot twist, there was no comeuppance. Instead, this point in time marked the beginning of the strategic shift that has actually expanded Netflix’s lead over the traditional entertainment companies, which are still struggling to make money in the business after pouring billions into streaming.

The end result can be seen in the stocks’ performance. Netflix stock is up 85.7% over the past year. By comparison, Warner Bros Discovery (WBD) is down 26.5%, Paramount Global (PARA) is down 17.8%, Comcast (CMCSA) is down 10%, and Walt Disney (DIS) is up just 14.4%.

Netflix’s Success

The outperformance is also clear in Netflix’s results.

There was great skepticism on Wall Street about the password crackdown, as the company began launching controlled tests in markets such as Chile, Costa Rica, and Peru in early 2022.

Some analysts thought the crackdown would end up losing customers for Netflix. Instead, it gave a turbo boost to Netflix’s growth for more than a year, with total subscribers reaching 277.6 million in the most recent quarter, up 16.5% from a year earlier.

Since launching its password crackdown domestically in May 2023, Netflix has now added 45 million paying subscribers! No wonder its share price has risen more than 114% since then, recently setting new all-time highs.

Today, nearly five years after the launch of Disney+ ignited the streaming wars, Netflix remains on top in terms of both subscribers and time spent on the service. In July, it captured about 8.4% of U.S. screen time. Its nearest rival, DIS, had 4.8% between the Disney+ and Hulu platforms combined.

The streaming companies run by the other Hollywood studios — Warner Bros Discovery’s Max, Comcast’s Peacock, and Paramount+ — all had less than 2% of viewing hours.

What’s Netflix’s Next Act?

Think about all of the successful changes at Netflix since 2022. The company launched an ads business from scratch, invested in its nascent video games division, and expanded its live “experiences” around popular shows such as Bridgerton, Squid Game, and Stranger Things. It has even started dipping into live sports.

Sooner or later, the surge from the password-sharing crackdown will start to taper off. The next leg of growth for Netflix may come from its other big initiative, advertising.

However, this will take more time before it is a meaningful contributor to the bottom line. The company partnered with Microsoft MSFT to use its system for delivering digital advertisements. It also began publicly releasing a list of its top 10 shows, allowing advertisers to target its most popular programs.

But, of course, Netflix is facing competition here, although not from the Hollywood studios. It is coming from Amazon AMZN, which competes with Netflix via its Prime Video service. That company also entered the streaming advertising business, and in its typically aggressive fashion, began to offer ad rates much lower than those Netflix was seeking.

So Netflix made a course correction and ditched Microsoft. It is now building an in-house advertising platform instead. That’s why the company now says that advertising will not be a “primary driver” of revenue growth until 2026.

In addition to advertising, Netflix is making a targeted move into streaming live events. These include streaming two NFL games on Christmas Day - Steelers versus Chiefs, and Ravens versus Texans.

It also signed a $5 billion, 10-year deal with World Wrestling Entertainment’s weekly Raw program. It is the company’s biggest foray into streaming live events, and could form a framework for Netflix, if it ever enters into a deal with a professional sports league.

The company's incremental moves into live-event sports programming makes sense. It will greatly enhance its advertising business, as live events have a higher value for advertisers than typical scripted content, and the NFL holds the most value in the U.S. sports broadcast market.

That’s another reason why I believe that Netflix, as the undisputed market leader in video streaming, can drive mid-teen revenue growth as well as wider operating margins.

Buy NFLX stock anywhere below $717, and ideally below $700 in a market pullback.