There’s no denying that the adoption of streaming video accelerated over the course of the past year and as the global leader, Netflix (NASDAQ:NFLX) was one of the ultimate beneficiaries. The company added more than 36 million subscribers in 2020, bringing its worldwide total to 204 million, and helping push the stock price up 67% last year.
This, of course, raised the inevitable question about how Netflix will follow up such a banner year. Several developments in recent months provide insight into the company’s strategy and there’s mounting evidence that Netflix could continue its growth trajectory in 2021.
Let’s look at three reasons why now is the time to buy Netflix stock.
1. Cracking down on password sharing
Netflix has long tolerated a certain amount of account sharing, even going so far as to say it was “a positive thing.” Back in 2016, CEO Reed Hastings explained, “We love people sharing Netflix whether they’re two people on a couch or 10 people on a couch,” Hastings said. “That’s a positive thing, not a negative thing.”
The company appears to have had a change of heart. In a move Netflix described as a test, some users got a message when logging into the service that read, “If you don’t live with the owner of this account, you need your own account to keep watching.” Viewers could opt to receive a verification code by text or email to authenticate the account. They also had the option to verify later. “This test is designed to help ensure that people using Netflix accounts are authorized to do so,” the company said in a statement.
Data suggests that as many as 33% of users share their Netflix password, according to data supplied by Magid Research. With 204 million subscribers, that could amount to at least 67 million unpaid viewers. Given the $14 monthly charge for Netflix’s most popular tier, the company is potentially forgoing more than $11 billion in revenue each year.
This crackdown could help boost the company’s monthly subscriber base, thereby boosting revenue.
2. Licensing content?
Netflix has long argued that the biggest reason people subscribe to its service is the seemingly endless library of movies and television shows available on its platform. In-house titles including Stranger Things, Ozark, and The Queen’s Gambit have catapulted Netflix to the top of the streaming video industry, and the company has promised that new in-house movies will be released every week in 2021.
The tech giant may be taking a page from the legacy media playbook and is exploring licensing some of its original content to other outlets, according to a report in The Information. Netflix is considering licensing some of its older movies and television shows, and has had discussions with Comcast‘s (NASDAQ:CMCSA) Peacock and ViacomCBS (NASDAQ:VIAC), among others.
While some Netflix originals, including Bojack Horseman and Narcos have appeared on other networks, they were co-produced by other studios that retained the rights to license them in the future. These recent discussions revolve around content that is solely owned by Netflix and could result in lucrative licensing fees for the streaming giant. It could also attract new Netflix subscribers into the fold by giving them an idea of the programming they’re missing out on.
3. Lower-cost subscriptions
Back in early 2019, Netflix tested a mobile-only tier in several countries that was significantly less expensive than its existing offerings. The lower-cost tier was available on just one mobile phone or tablet at a time with standard streaming quality. The test was ultimately a success and later that year, the company announced the mobile-only plan was here to stay, initially rolling the plan out in India.
At the time, Netflix said it “will be an effective way to introduce a larger number of people in India to Netflix and to further expand our business in a market where Pay TV ARPU [average revenue per user] is low (below $5).”
Bank of America Securities analyst Nat Schindler suggests this might be a precursor to a tier that caters to “price-sensitive consumers,” citing the success of the test in India and other countries.
Fuel in the tank
With the accelerated adoption of streaming video that occurred during the pandemic, it’s widely believed that some of Netflix’s growth in 2020 came at the expense of slower subscriber additions in 2021. That could certainly be the case. However, the streaming giant was cash flow positive last year, and it expects that to be the case going forward.
Given the evidence, there are plenty of reasons to believe that for long-term investors, the Netflix growth story is far from over.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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