When it comes to achieving success in the burgeoning streaming industry, content is king. Companies with deep pockets have the ability to spend huge sums of money in order to develop and acquire the best shows, movies, and documentaries. This keeps existing customers satisfied while at the same time attracting new ones.
As the leader in the space, Netflix (NFLX -3.92%) had an incredible 209 million subscribers as of the second quarter, and it generated $27.6 billion in trailing-12-month revenue. This size is why management was comfortable planning to spend over $17 billion on content in 2021.
Here's why that number is so important to the business.
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Viewers have more choices than ever when it comes to streaming services. Besides Netflix, options like Walt Disney's Disney+, Amazon Prime Video, AT&T's HBO Max, ViacomCBS' Paramount+, and Comcast's Peacock are all fighting for our eyeballs. Ultimately, the service with the best and widest selection of content has the odds stacked in its favor.
When Netflix first launched its streaming service in 2007, there was no direct competition, so management could borrow capital at low interest rates and invest in developing its technology and content offering, all to gain as many customers as possible before rivals showed up. This head start was critical to Netflix's success.
Having hundreds of millions of subscribers makes it economical to spend $17 billion on content in a single year (and a combined $38.7 billion in the previous three years). Since no other company has this many paying customers, Netflix can spend more than peers in absolute terms, but it still makes financial sense on a per subscriber basis.
Streaming is an industry where scale matters. Newer entrants can have a difficult time gaining customers not only due to heightened competition but also because it will take a massive amount of capital to even try. Playing catch-up is never a good strategy.
Netflix's first-mover advantage is why the stock is up more than 3,800% over the past decade. And during this time, the business has certainly become adept at creating compelling content. Paying 11-figure sums year in and year out has made Netflix a force to be reckoned with in Hollywood. The company just tied an all-time record with 44 Emmys in a single year. And in April, it took home seven Academy Awards.
Thanks to an annual content budget equivalent to the value of a large-cap stock, expect Netflix to stay atop the streaming market.
Are you still watching?
Netflix has clearly been a fantastic company to own for early shareholders. However, if you've been watching the stock from the sidelines all this time and missed out on the impressive gains to date, don't worry. Buying the stock now could still prove to be a smart decision for your overall portfolio.
In the fourth-quarter 2020 shareholder letter, management highlighted the company has reached a financial milestone and should no longer need to access the capital markets in order to run day-to-day operations. And the company still expects to break even on a free-cash-flow basis this year before generating positive cash flows going forward. This optimistic financial picture is also why a share buyback program of $5 billion was authorized in the first quarter of this year. The business has entered a new phase, but it still has a lot of growth left.
This is an outstanding company that has always put the customer first. Focusing on improving the viewing experience by constantly bolstering its content library has kept Netflix at the top of the streaming industry, and it will propel the business for many years to come.
