Since activist investor Carl Icahn took a public stake, shares of Netflix, Inc. (NASDAQ:NFLX) have been on a tear. Shares really took off after the firm reported strong earnings for its fourth quarter and a bullish outlook for the first quarter of 2013. Shares have nearly doubled in 2013 alone, and it seems the market is getting even more bullish on Netflix, Inc. (NASDAQ:NFLX).
We at Valuentum believe this has less to do with recent earnings trends, but rather, we believe the success of House of Cards has been a positive catalyst for the stock. The show has received fantastic reviews with an aggregate score of 9 on IMDB.com, and it has been mentioned in the same breaths as blockbuster cable shows like Breaking Bad and Mad Men. Although it’s just been one season, one could argue House of Cards is one of the most popular TV shows in the US—and it’s not even on TV!
Initially, we were a tad skeptical of Netflix, Inc. (NASDAQ:NFLX)’s decision to release the shows at once. Some viewers like the anticipation of waiting for a new episode every week, but there is also a growing trend of binge consumption. We actually like the idea of allowing consumers to watch when they see fit, though 13 episodes could be finished in 13 days rather than 13 weeks. Even if the show was a huge hit, would Netflix subscribers stick around?
It’s still too early to tell, in our view, but we doubt people signing up to see the show will simply cancel. For one, it is always a slight inconvenience to cancel a service, simply because it takes effort. However, we think people new to Netflix might discover the content catalog and become convinced the service is well worth the monthly fee. Netflix’s streaming TV content is tremendous in terms of breadth and depth, and we’re seeing consumers respond accordingly.
We think the big game changer could be a price increase—but we’re not sure Netflix, Inc. (NASDAQ:NFLX) customers would be ready to stomach it. Consumers seem a little hesitant to pay more for the service, in spite of what we think is a pretty good value. Yet, if the company were to find a way to partner with a few TV stations a la carte, say The Walt Disney Company (NYSE:DIS)’s ESPN and AMC, then people might be more willing to “clip the cords.”
ESPN in particular could be interested in exploring nontraditional strategies for content dissemination. For one, we do not believe Disney’s other channels would suffer since most of them are already popular on a standalone basis. Further, with the costs of sports rising at a steady rate, we believe the network could need to find more revenue drivers to offset cost increases. Still, going a la carte or partnering with Netflix would be a risky strategy, and we’d likely see some tension with traditional cable providers arise.
Regardless, we’re extremely excited about Netflix, Inc. (NASDAQ:NFLX)’s ability to make content, and the fact that this show is a hit gives the company credibility going forward. The fourth season of Arrested Development is the next Netflix, Inc. (NASDAQ:NFLX) produced show that will be released, and we think it will be a smashing success—perhaps bigger than House of Cards—because it already has an enormous built-in fan base. New shows may not receive the same acclaim as House of Cards, but we think Netflix’s credibility will help deter consumers from developing prejudice against the firm’s internal productions.
Of course, how popular and critically acclaimed the shows are is fairly irrelevant unless the company is able to drive subscription growth to cover the costs. Some say that CEO Reed Hastings paid $100 million for just two seasons of the show, so the strategy wasn’t without risk. Given the current cost of Netflix, Inc. (NASDAQ:NFLX) ($7.99/month), it would take 1,042,970 subscribers to generate $100 million in revenue. Will new shows drive such enormous amounts of subscribers? That remains unclear, but adding some competition to the content space could help content costs from ballooning, which is the biggest threat to the company’s business.
Even though content creation is a fundamental positive for Netflix, it will not change our valuation at this time, so we at Valuentum think shares look overvalued. House of Cards may be a winner for consumers, but it will take time to see it it’s a winner for Netflix, Inc. (NASDAQ:NFLX).
The article House of Cards – A Sign That Netflix Can Become a Content Creator originally appeared on Fool.com and is written by RJ Towner.
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