Does This News Make Netflix Stock a Buy?

Netflix (NASDAQ:NFLX) has not performed well over the past year. The company's financial results haven't been strong, engagement on its platform isn't meeting market standards, and competition in the streaming industry is heating up. Can Netflix bounce back and still perform well over the long run? Recent reports suggest that the company is actively looking for ways to improve the business, and one initiative it is considering could be a game changer. Let's discuss what Netflix's management is cooking up behind the scenes and what it means for the company's future.

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Netflix is considering a shift in strategy

Netflix no longer publishes its number of paid subscribers every quarter. But according to some estimates, it has 325 million paid subs and is well ahead of its peers. That may be why the company is considering opening up its platform to some of its competitors. Netflix is apparently weighing signing deals with other streaming services to allow its members to subscribe to and watch those services without leaving the Netflix app. So, Netflix could become a go-to streaming hub.

This would be a reversal in Netflix's strategy, since the company had previously resisted this idea. For instance, in the press release announcing its financial results for the second quarter of 2024, Netflix said:

We haven't bundled Netflix solely with other streamers like Disney+ or Max because Netflix already operates as a go-to destination for entertainment thanks to the breadth and variety of our slate and superior product experience.

How it could impact Netflix's financial results

If Netflix moves ahead with these plans, it could have a massive impact on the company's financial performance. For one, it would almost certainly increase engagement on its platform since some of the time subscribers spend on other streaming services will be redirected to its app. Sure, they wouldn't be watching Netflix's original shows if they were merely accessing another platform through its app. But this spike in engagement will make Netflix a much more attractive advertising platform and boost ad-related revenue. This business still accounts for a fairly small percentage of the company's top line.

Netflix estimates it will generate $3 billion in ad sales this year, roughly double last year's total. But that represents slightly less than 25% of the company's second-quarter revenue. Ad sales would become a much more meaningful growth driver with the new strategy the company is considering. And there might be other benefits. Netflix could charge other streaming services for access to its customers, creating a high-margin revenue stream. This initiative may also give Netflix access to even more data to improve its recommendation algorithm and content strategy, thereby strengthening its core business.

Is Netflix stock a buy?

This wouldn't be the first time Netflix decided to do something it had long said it wouldn't. The company launched its low-price ad-supported tier several years ago, after spending years scoffing at the idea of displaying ads. The results have been excellent. Netflix was able to appeal to price-sensitive customers and compete with other streaming leaders that offered similar low-priced options. This is a sign that Netflix's management is flexible and willing to change its strategy as the competitive landscape evolves, a great quality for a leadership team. Meanwhile, Netflix still has a vast opportunity across streaming and advertising.

Streaming still accounts for less than 50% of television viewing time in the U.S., arguably one of Netflix's most penetrated markets. There remains a massive runway for growth for the company as cable continues to die out. Further, Netflix benefits from a wide moat. The company's brand name is intimately tied to streaming, and its deep ecosystem exhibits a strong data feedback loop, as more viewers mean more data to inform its content strategy. Netflix would be leveraging this advantage if it decides to grant its users access to other streaming platforms through its app.

The bottom line: The company still has ample monetization opportunities that could help it improve its financial results and bounce back from its recent slump. That's why the stock is still a buy.

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