Is This Acquisition a Game Changer for Netflix?

Netflix (NASDAQ: NFLX) has underperformed broader equities over the past six months. Between disappointing third-quarter financial results, a recent guidance that implies slowing top-line growth, and the company's rich valuation metrics, some investors have chosen to run for the hills. However, Netflix is arguably still a top pick to capitalize on the rapid growth of the streaming industry. And the company continues to look for ways to strengthen its dominance in the field. To that end, Netflix recently made an acquisition that investors should take note of.

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Doubling down on artificial intelligence

In March, Netflix acquired InterPositive, a company that seeks to build artificial intelligence (AI)-powered tools for filmmakers. The streaming leader reportedly paid about $600 million. Why is this deal important for Netflix? The company's content strategy has been instrumental to its success. Netflix's original creations have won countless major awards. By launching advanced AI-based tools for filmmakers, Netflix could achieve several goals.

First, it could lower production costs. If Netflix can reduce these expenses through the magic of AI, it could deliver content of the same quality -- perhaps even better -- while boosting margins and earnings. Second, Netflix could also increase efficiency for filmmakers, helping them produce more content faster than they did before. So, we could see more movies and TV shows, of the same quality, at a fraction of the price. This would likely boost engagement on the platform.

How much could this acquisition move the needle for Netflix? We won't know immediately, but it fits right into the company's strategy and can help it remain the leader in streaming. Netflix still has a massive growth runway ahead, considering that streaming made up only 48% of television streaming time in February in the U.S., according to Nielsen. Could the company's valuation be an issue over the long run? The company is currently trading at 28.8x forward earnings, well above the 22.2x average for communication services stocks.

However, even with slower growth in the second quarter, Netflix is still fairly early in capitalizing on some of its growth opportunities. The company projected that its advertising business will generate $3 billion in sales this year, up 100% from 2025. This segment is still relatively new, and given Netflix's deep ecosystem and massive amount of data that can allow it to craft highly targeted ads -- not to mention the fact that the digital advertising industry boasts strong margins -- it could eventually meaningfully move the needle on the top and bottom line sfor the streaming specialist.

At any rate, Netflix is worth a premium, in my view, given its leadership in its niche, competitive moat from its brand name and network effects, and significant opportunities ahead. And the company's efforts to improve its content production capabilities through AI -- while not a game changer per se -- will still make things better. That's why the stock remains a buy.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.