Owning great businesses for the long haul is a great strategy for achieving outsized returns in the stock market. One crucial factor that makes a company great is the ability to offer optionality, making available complementary products or services for customers. This ability has the potential to create more shareholder value over time.
Optionality creates an opportunity for companies to surprise customers in a good way, and it's something all investors should want from the stocks they own. Some recent developments helped confirm that two companies, Netflix (NFLX 0.94%) and Peloton Interactive (PTON -4.90%), possess this key characteristic.
Read on to find out what these two consumer favorites are up to.
1. Netflix: Leveraging prized intellectual property
The leader of streaming entertainment, with its 209 million worldwide customers, has a massive content budget this year of $17 billion. This allows Netflix to outspend peers to continue driving membership growth and engagement. And the valuable intellectual property the company develops over time, from its most popular shows and movies, presents it with other ways to attract users' attention (and dollars).
In order to increase engagement, the business recently announced that it's entering the video game market. With the hire of industry veteran Mike Verdu as VP of Game Development, Netflix will offer games on its mobile app as a free addition for subscribers. Netflix reckons that 70% of its viewing happens on a TV, so this initiative is a way for the company to get more users interacting with the brand on their smartphones.
While the move won't directly generate any additional revenue, it's a clear signal that Netflix is staying true to its original strategy of constantly improving the consumer experience. If more eyeballs spend more time on Netflix's service, the company considers that a huge win.
Netflix also announced the introduction of Netflix.shop -- an online site for loyal customers to purchase limited-edition, high-quality apparel and lifestyle products tied to their favorite characters and stories from shows on Netflix. Again, this won't really move the financial needle for Netflix, but it does support the overarching goal to keep increasing engagement.
The streaming wars are heating up, and Netflix is doing whatever it can to be top of mind for viewers, something that will help its ambitions for years to come.
2. Peloton: A sticky platform with numerous benefits
Peloton's extremely popular connected-fitness equipment and subscriptions, of which the company has 2.1 million, provide a valuable platform to introduce additional features. Besides releasing different-priced versions of its bikes and treadmills, the $36 billion company has already begun working on a digital heart rate monitor that can be used to track users' workouts.
Whether Peloton ultimately ends up entering the wearables market is yet to be seen, but it shows the vast optionality the business has. Just think of the other types of fitness equipment, like a rowing machine or elliptical, that it can develop in the future.
And like Netflix, Peloton is launching a video game for its Bike and Bike+. The title, called Lanebreak, will be an interactive experience with the main goal of driving engagement by getting its members to take more classes. Gamifying fitness could be Peloton's next pillar to attract new customers.
Peloton is also increasing its reach with its new corporate wellness program, allowing organizations to provide its employees with access to the digital app, as well as offers on equipment. Furthermore, the company has partnered with UnitedHealth Group to give eligible policyholders free access to Peloton classes for up to one year.
I don't think Peloton has scratched the surface with the initiatives it can pursue. It spearheaded the at-home fitness trend, and now it's finding ways to expand its addressable market while entering new ones. At the same time, it wants to get its current users to keep coming back for more.
The takeaway for investors
Optionality creates chances for businesses to surprise shareholders to the upside. This can have a profound impact on revenue and earnings growth over time. Some things just can't be predicted beforehand, but if a company's management team is open to new ideas and constantly innovating, then positive things can happen.
Netflix and Peloton are two wonderful examples of companies leveraging their ultra-successful core business lines into newer ventures. As investors, this is the type of strategy you want from the stocks you own.