Video-streaming leader (and now video-game up-and-comer) Netflix (NFLX) has made its intent to expand into the video-gaming universe clear. Thus far, the company has made a modest entry into the space, with the acquisition of small-time game developer Night School Studio and a small line-up of mobile game offerings.
Indeed, Netflix looks like it’s just dabbling in gaming right now. If anything, further expansion into the space is unlikely to give mobile-gaming frontrunner Apple (AAPL) anything to worry about, especially given Netflix users need to download each Netflix game from the App Store individually rather than simply enjoying it through the Netflix app.
For now, Netflix’s gaming offering looks like it may one day give Apple Arcade’s service a good run. However, for now, Netflix looks keen on sticking within mobile to modestly improve the value proposition for consumers, justifying recent price increases on the company’s flagship video-streaming service.
The slow and steady move into gaming is only wise in my books. I remain bullish with shares fresh off a nasty decline, as recent weakness may be more of a near-term blip than a significant change to the narrative.
Netflix and its Gaming Entrance: Slow and Steady Could Win the Race
Competition is getting more fierce. As long as Netflix can continue producing a tremendous amount of quality content while also looking to disrupt new market verticals, the stock is still worth a premium growth multiple.
Netflix has its video-gaming ambitions, but it’s off to a slow start, with a lot of catching up to do in the year ahead. For now, count Netflix as just another one of the big-tech companies likely to be interested in M&A as the video-gaming industry consolidates.
Tech behemoth Microsoft (MSFT) has an enviable lead in the space with its Xbox division. If its Activision Blizzard (ATVI) deal gets approved, it will be tough to dethrone the firm in gaming. Indeed, Microsoft is the Netflix of video games right now. Though, Netflix could make a worthy challenger as the company looks to new horizons to unlock next-level growth.
Indeed, the video-streaming space is crowded enough as is. An argument could be made that Netflix should spend its money solely on content production. Still, I’d argue that Netflix is right to begin spending on gaming efforts. Further, recent trends suggest gaming and video services ought to be offered as a part of a big bundle to stay competitive with consumers.
Bundling Services to Give Customers a Great Value Proposition
Whether we’re talking about Amazon (AMZN) and Prime or Apple and its Apple One service, bundling of parallel services could be what keeps consumers locked in.
With more options in the video-streaming space these days, Netflix needs to give consumers a reason to continue paying up those monthly subscription fees after they’ve finished binge watching their favorite content. Otherwise, switching across services in any given month represents a major risk that could exacerbate the volatility of any given quarter.
Mobile gaming is a fast-growing segment, and if Netflix plays it smart, it can get a pretty solid bang for its buck. Netflix is an incredibly smart allocator of capital, after all. Even with the burden of high video-content spending, Netflix has the financial wiggle room to turn its flagship streaming platform into more of a bundle of high-quality entertainment services.
While I don’t expect Netflix to challenge the likes of Microsoft and Xbox Game Pass anytime soon, I would watch Netflix closely as it looks to make its next moves. A large gaming deal (or series of smaller ones), with more clarity on its plans, could reignite excitement and allow the stock to roar higher.
Wall Street’s Take
Turning to Wall Street, NFLX stock comes in as a Moderate Buy. Out of 35 analyst ratings, there are 17 Buy, 15 Hold, and three Sell recommendations.
As for price targets, the average Netflix price target is $521.21, implying an upside potential of 31.1%. Analyst price targets range from a low of $342.00 per share to a high of $750.00 per share.
The Bottom Line on Netflix Stock
CEO Reed Hastings is a man known to stay on his toes. I wouldn’t be surprised if Netflix is ready to prove that it’s prepared to put its disruptor hat back on after its latest quarter revealed considerable pressure from rivals.
At the end of the day, it’s not about becoming a leader or dethroning the leader when entering a new market; it’s more about improving the value proposition for customers while keeping spending in check. On that front, Netflix has the levers to pull to keep its customers happy while beckoning in new ones from rival entertainment service bundlers.
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