Optionality refers to a company's ability to create new revenue streams by launching new products and services related to its core operations. And it's an important thing for investors to consider when picking a stock to buy. Companies with a single product have a limited market opportunity. But by exercising optionality, they can grow their market and (if they successfully execute) can deliver outsize shareholder returns for many years.
Fool contributor Danny Vena believes Netflix (NASDAQ:NFLX) still has optionality. In this video clip from Motley Fool Live, recorded on July 15, he explains how the company is leveraging its intellectual property by launching a video game business. If successful, this could be just one way Netflix can keep growing its business far longer than its critics might think.
Danny Vena: You know what, sometimes I get on a roll with Netflix and this is just one of those cases. I saw in news that hit this morning, which was actually a follow-up, I remember writing about this story back in May that Netflix was looking for a gaming executive, and it appears that they've actually found one. The company has hired Mike Verdu. Mike was formerly the head of Facebook's efforts to develop games for its Oculus virtual reality headsets. According to the story that I read in Bloomberg, the idea is to offer video games on Netflix's streaming platform sometime within the next year, and this is according to the oft-quoted "person familiar with the situation." That doesn't necessarily mean it's going to happen, but those are the plans as they're being reported.
Now, I think it's important to note that what they're saying is the company doesn't plan on charging anything additional for this gaming content once it's available. This is similar to the strategy that Netflix employed when it first added streaming to the company's offerings. They had the red envelopes and oh, by the way, if you want to set up an account, you can get online and whatever limited streaming offerings they had at that time, you could tune into and watch, and that eventually became their biggest cash generating machine is the streaming.
One of the things that I see in the future evolution of Netflix is the fact that they have a growing library of intellectual property. Now, you may not know or can name dozens of Netflix programs off the top of your head, but surely, I mean, everybody that's a Netflix subscriber could name a few. Some of the more popular ones being Stranger Things or The Witcher. These are areas that Netflix could potentially mine to become more valuable intellectual property, and one of the ways of doing that is creating video games, just another way to monetize the content that they already have. I thought it was interesting. I read an analyst take on this and said, "this is a natural extension of Netflix's content strategy, allowing it to mine intellectual property for popular shows like Stranger Things. Though it may not generate much additional revenue, it will help deepen engagement and increase the company's appeal and pricing power," which we were talking about before. "Don't expect it to be a turning point, but it shows the company is willing to explore new formats to increase the amount of time spent on the platform," and that is courtesy of Bloomberg insights media analyst, Geetha Ranganathan.
Now, it's important to remember that Netflix was originally known for streaming other people's content before it started creating its own programming, and even then, Netflix was known for sponsoring these documentaries and stand-up specials before it expanded into the television series and most recently this big push in movies. I think what all this says is that Netflix still has optionality. There are still ways that Netflix can expand its ecosystem, there are ways that it can still get more money out of subscribers, and not only that, but if it does develop a cache of games, it could potentially attract new customers that it doesn't have yet.