Netflix (NFLX -0.20%) has found its groove. Although the streaming specialist faced some headwinds several years ago that caused its stock price to decline, the company has since recovered and is performing exceptionally well.
Netflix's latest quarterly update was yet another smashing success. The bulls might rightly point to the company's strong results as a reason to buy the stock, or the company's dominance in the large and growing streaming industry.
All those are, indeed, solid arguments in favor of Netflix, but there is one that investors shouldn't overlook: Netflix's approach to the artificial intelligence (AI) revolution.
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There is more than one way to leverage AI
Generative AI is a powerful technology. Although everyone is familiar with chatbots like ChatGPT, which are primarily geared toward answering queries and generating text, some applications can also be used to create pictures and even videos, doing so relatively quickly and at a low cost.
Part of Netflix's strategy is to create content that its users will love watching. It could be tempting for a company in this position to utilize GenAI to produce inexpensive content. There have been similar strategies in other industries. Some companies have fired their employees, thinking that AI would replace them, only to hire many of these same workers back.
Netflix's approach to using GenAI in its content creation will be a careful one, according to management. Consider what Netflix co-CEO Ted Sarandos said about creators using GenAI during the company's second-quarter earnings call transcript: "Our creators are already seeing the benefits in production through pre-visualization and shot planning work and, certainly, visual effects. It used to be that only big-budget projects would have access to advanced visual effects like de-aging."
So, GenAI is not fundamentally changing the way Netflix makes content. The company is utilizing it as a tool to help improve the process.
The approach could yield results in the long run
Here's why the company's strategy in using AI is sound. The quality of Netflix's creations is central to its success. The company has made a living by producing shows that generate excitement, discussions, and debates, and spread through word of mouth. Eventually, these attract more subscribers to its platform, and the more subs it has, the more data it can analyze on viewer preferences to help guide its content production strategy.
Now, thanks to AI, Netflix will be able to supercharge this strategy. The company isn't interested in cheap content. What it wants is better content.
AI can make previously prohibitively expensive special effects more attainable, while also streamlining the pre-production and production process, thereby improving the quality of movies and shows made with the same budget.
That means more high-quality content, and, potentially, more engagement (in terms of viewing hours) and more subscribers. This could then lead to higher revenue from subscriptions and advertisements, as well as increased profits.
All that won't happen overnight. But if Netflix's approach to using AI in its content production works as intended, the company will meaningfully benefit over the long run. And there is at least one more way in which it plans on using AI.
Netflix is currently testing ways for its users to search for movies and shows they enjoy by communicating directly with its interface in a natural, conversational tone, similar to how customers interact with virtual assistants. These initiatives aim to help users find content they enjoy more easily, ultimately increasing engagement.
Some tech companies have achieved massive success in using AI-powered algorithms to drive increased engagement on their platforms. That could also happen to Netflix.
Netflix is a great long-term bet
Netflix is looking at a massive worldwide opportunity in streaming. It continues to wrestle viewing hours away from cable, but there is still plenty of whitespace left. In the U.S., one of the most penetrated streaming markets, streaming accounted for 46% of television viewing time in June.
Netflix's growth has helped spur the industry, but the global landscape remains underpenetrated. That's a great reason to invest in Netflix's stock. The company's financial results, combined with its moat stemming from the network effect and a strong brand name, are additional solid arguments.
However, investors shouldn't forget about the positive impact AI could have on Netflix's business. Netflix may not be a leader in AI, generating billions in revenue thanks to the technology, but the company's AI strategy looks promising and could significantly improve its business over the long run.
Netflix would be a buy even if the market was not in the midst of an AI revolution. The fact that it is, and that Netflix plans to profit from AI advances, makes the stock even more attractive.
