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Netflix Watches Content Strategy Pay Off

26 April 2013 in Trading Ideas

The one-day jump of 23% in shares of Netflix on Tuesday has resulted in the online streaming and DVD rental king enjoying, for now, the title of best performing stock on the S&P 500.

Yes, you can take your biotech phenoms, your shale energy plays, it’s Netflix that has posted a 134% rise in 2013. What’s more – it’s also the No. 1 performer on the index since the market’s previous peak in 2007.

The company’s latest runup was inspired by its latest earnings report late Monday, which saw the company swing to a small profit in its latest quarter from a substantial loss a year earlier. More importantly, Netflix said it ended the quarter with 29.2 million people in the US subscribing to its $8-a-month streaming video plan.1

Much was subsequently made that this figure eclipsed the domestic subscriber figure disclosed three months earlier by Time Warner’s HBO premium cable TV network.

This is no coincidence, since Netfix sees HBO’s trajectory as both a blueprint for its future plans – as well as having to defend its own streaming video turf against HBO’s strategy for its own To Go Service. As Ted Sarandos, Netflix’s chief content officer, recently put it, “The goal is to become HBO faster than HBO can become us.

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For Netflix, that has meant journeying into original programming, including its well-received House of Cards series that debuted earlier this year. It has just begun its Hemlock Grove horror series, and later this year, the company will debut a children’s program about a speedy snail.

Content, original and otherwise, is the lifeblood for Netflix, which is looking to maintain – and expand – its hold on the American viewing public. Already, the company’s service commands 87 minutes per US household per day – more than any other US cable network.

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For Netflix shareholders, one potential downside is that the cost for securing content is on the rise. As Bloomberg reported, the company’s total content liabilities ballooned to $5.7 billion at the end of its recent quarter, up from $4.8 billion a year ago.2

Whatever that means for Netflix and its investors going forward, it could mean good things for creators of the content that makes up the bulk of Netflix’s offerings, as well as that of rivals Hulu and Amazon, both of which are squarely in the market for original and existing content.

1Zachary M. Seward, “Four superlatives for Netflix, which is now bigger in the US than HBO,” Quartz.com, April 22, 2013, http://qz.com/77067/netflix-now-bigger-than-hbo/#77067/netflix-now-bigger-than-hbo, (accessed April 23, 2013).

2Bloomberg TV, http://www.bloomberg.com/video/netflix-to-pay-5-7b-for-future-content-NfBYeS5GR2OP91ou7YfraQ.html, (accessed April 23, 2013).