Netflix (Nasdaq: NFLX) has once again become an outperformer among its tech peers after underperforming for the last couple of years. This is underpinned as the stock made new, all-time highs this month, while many other tech stocks led the market on the downside.
This strength comes despite some skeptics seeing the company facing a tough time given more competition in the streaming space, the increased cost of content, and the company reaching saturation point in terms of subscriber growth. However, the company has proved to be durable in terms of retaining subscribers.
Video Games
Now, the company has a newest catalyst in the form of video games as the streamer is reportedly planning to launch video games in the near future. Recently, it bought a video game studio and rolled out 5 games to smaller markets as a pilot test.
For so long, the proposition behind Netflix's multiples and stock price was that the company would focus on growth and offering the best video library and then eventually focus on profits by raising prices. However, the proliferation of new streaming options has complicated this picture and eroded Netflix's pricing power.
Therefore, this move by Netflix has the potential to create another revenue and income stream. Netflix could monetize games by offering premium features or in-game purchases. Already, the company is launching games that complement content on the platform.
The company has 209 million customers, so it will be interesting to see what percent of customers engage with the new feature.
Stock Price Outlook
Netflix's stock price underperformed from July 2020 to July 2021 amid concerns of rising costs and slowing revenue growth. However, the video game market unlocks another way to increase revenue per subscriber and increase user growth and retention.
Further, the company's valuation continues to improve especially as its revenue and earnings increased while the stock price was flat. This is evident in its forward P/E of 49 with 19% revenue growth and 16% profit margins. Equally important, the company now has a pathway to growth and margin expansion that didn't seem likely a few months ago.