Netflix (NFLX -0.61%) spearheaded the cord-cutting and streaming trend over the past several years, amassing an incredible 208 million subscribers worldwide and generating $26.4 billion in revenue over the last 12 months.
But after a monster 2020 in which member growth skyrocketed, the $240 billion business added a disappointing 4 million customers in the first quarter of 2021. What's worse, it seems like the lucrative U.S. and Canadian markets are getting saturated, with only 450,000 adds in the most recent quarter.
New developments about Netflix's potential foray into video games, as well as its announcement of an online store, could be the streaming giant's admission that to achieve fast growth, new revenue sources are needed.
Let's find out what Netflix's pursuit of product diversification means for investors.
Image source: Getty Images.
Expanding the product portfolio
At the end of May, it was widely reported that Netflix was looking to hire a video game executive to push into that market. In addition, rumors swirled that in 2022, the company could launch a subscription gaming service similar to Apple Arcade as a way to further monetize its large customer base.
While it's unknown if Netflix would license third parties or develop games in-house, the evidence is mounting that the company wants to create more interactive features for its viewers. Movies like Black Mirror: Bandersnatch allowed viewers to choose the direction of the story. Furthermore, shows like Resident Evil and The Witcher are based on popular video games. It's not hard to see the crossover capabilities between movies, shows, and video games.
In addition to pursuing new video entertainment, Netflix in June launched netflix.shop, an online store that plans to sell high-quality, limited-edition apparel and products based on its content catalog. Netflix has long used outside partners like Target to create and sell clothing based on shows like Stranger Things. But this time, Netflix wants to run the show.
The website currently offers a small sample of products, including streetwear and action figures based on the anime series Yasuke and Eden. However, expect this to expand considerably. Apparel and decor based on the hit French series Lupin are expected to drop soon.
Netflix plans to work with up-and-coming artists and designers to produce products. And compared to Walt Disney, which has a long history of merchandising for the mass market, it seems like Netflix wants to focus on the higher end of the spectrum. Therefore, we can assume that this won't really move the financial needle for the company. Instead, it's a key lever that can be used to engage more with its most loyal customers.
How should investors interpret this?
Generally, anytime a company begins to announce new strategic avenues or products, it could be a sign that the growth engine that got it to that point is slowing down. In Netflix's case, however, I don't think this is true. Overall, the possibility of a video game offering and brand-relevant merchandise sales should be something that investors cheer.
The streaming operation is still firing on all cylinders and exhibiting remarkable growth, even at this size. Revenue in the first quarter soared 24.2%, and Netflix is able to consistently raise prices like it did late last year, with no effect on member churn or engagement. There is also plenty of room to gain customers overseas, particularly in India.
Video games (still speculation at this point) and merchandise sales (already underway) will just be incremental and complementary to the streaming business. Netflix has built valuable intellectual property over the years that it is now looking to monetize in new ways. That's the right move from a strategic perspective, as long as it doesn't take management's attention away from the company's content-streaming bread and butter.
Netflix is a fantastic business, and its stock has been a huge winner over the years. Shareholders shouldn't be surprised if it keeps outperforming the market in the years ahead.
