Netflix's Offline Option Is Part of a Larger Growth Initiative

GuruFocus.com

- By Sangara Narayanan

Netflix (NFLX) announced last week that users can now download shows and movies using their account, a move the company resisted for so many years because they believed streaming is the future.

Downloads make a lot of difference from a user's perspective.

Although most of us will not be downloading each and every title we come across, many users prefer to have access to offline viewing, especially when on the move. Others might like to have a small collection downloaded to their devices for quick access when the connection is down or slow.


Netflix said in the past that it would consider an offline option for users in international markets where internet connection can be dodgy or slow, but pressure from several sides seems to have prompted the company to do a global rollout of the download option.

The download option is currently restricted to certain original titles and you will not see a lot of the latest programming, but at least Netflix has arrived at a point that several of its peers have already crossed. The move could potentially attract a much larger user base in international markets with less-than-optimal internet connectivity.

How does this connect with Netflix's overall growth strategy?

As any investor knows, the fortune of Netflix stock is closely related to published subscriber numbers every quarter. Over the past three quarters, their performance has been less than impressive in two of them. In the chart below, one can see their stock moved downwards just after the earnings announcements on the quarters with "subscriber shockers." Conversely, it jumped after the recenlty reported quarter when the company beat subscriber growth guidance.

Introducing the download option is just one of the many initiatives that Netflix has undertaken this year to nurture and grow its user base around the world.

To further drive subscription growth, Netflix has joined forces with its rival Comcast (CMCSA) to take its services into the cable world, increased its own programming spending and signed a deal with iPic Entertainment to release its films in theaters. Meanwhile, it continues to reduce the number of movie titles in its library while increasing its own content.

This has always been the hallmark of Netflix: their adaptability and ability to change directions as the situation demands. This is not a company that likes to let things happen to them. Rather, it prefers to control the narrative as much as possible.

With the pace of user growth slowing down at home, Netflix is pulling all the strings it can to keep its leading position in U.S. safe and intact. The growth of Amazon's (AMZN) Prime Video is indeed a threat because the company has deep pockets and has proven to be a relentless competitor once it sets its eyes on a particular market - be it retail or cloud infrastructure services.

The advantage Netflix has is content, so whatever money it makes will be ploughed back into its content-building efforts. For companies like Amazon and Google (GOOG), their SVOD efforts are only a small part of their overall businesses. Leveraging this advantage, Netflix is leaving nothing to chance.

These latest initiatives are not the typical actions of a market leader with solid growth numbers, but that is Netflix in a nutshell. It is not going to sit on its laurels and allow other players to usurp its dominant position. The company is clearly focused on growing as fast as it can and, as a hyper-growth story of our times, the stock will remain volatile for quite some time. As such, it is still a bit pricey at more than six times sales.

The stock will move rapidly with news, tracking subscriber growth worldwide more than revenues or margins. The result of this must be a sound investment strategy that builds into a position rather than creating a large one in a single go.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.