The $100 Billion Question: How Can Investors Find the Next Netflix?
Netflix is a shining star of Silicon Valley and technology stocks. It recently passed $100 billion in market capitalization, and its stock price has skyrocketed from $25 per share in 2013 to $560 per share in February 2021.
Stock analysts often look at successful stocks like Netflix and attempt to find patterns and indicators of success that might be present in other companies. If that analysis can find enough similarities, they may have found a winning stock that is poised to follow a similar path.
With that in mind, let’s look at three of the biggest reasons for Netflix’s success, and consider what other companies share those traits.
One key to success in technology stocks is scalability, or the ability to create a product or service once and deliver it again and again. This is true in both software as a service (SAAS) companies and content companies.
For example, Netflix can spend money once to create a new movie or series, and then show that movie or series to streaming subscribers again and again with minimal additional cost. It also uses its extensive infrastructure to stream movies and shows licensed by other content creators, like major Hollywood movie studios.
Spotify (NYSE: SPOT) offers a similar service to Netflix, except with a focus on music and audio instead of movies and video. While its hybrid advertising- and subscription-based platform works a little differently than Netflix does, its 2018 IPO in the United States makes it an interesting stock to watch.
Data-Driven Marketing to Existing Customers
Netflix was a pioneer in marketing to existing customers, and their unique methods led to some serious customer loyalty. Based on what you already like, it suggests new movies and shows you might like. That keeps you watching—and paying those monthly subscription fees.
Netflix is by no means alone in using data to keep existing customers engaged. Amazon, for instance, uses similar tactics to advertise products to existing customers based on their shopping preferences. But of course, Amazon has already seen huge growth, and part of successful investing is identifying new companies that still have major growth ahead.
One newer company that uses similar methods of advertising to existing customers is Stitch Fix (NASDAQ: SFIX), a personalized styling service. After you sign up, you are sent a personalized delivery and can keep what you want.
But with the knowledge of what you already like, Stitch Fix is in a great position to convince one-time customers to become repeat buyers. And with the rise of artificial intelligence and machine learning, those suggestions will keep getting better and better.
Make It Easier for Consumers to Get What They Want
Video stores have been around since the 1970s, and consumer desire to watch movies at home hasn’t abated. Netflix took this experience, made it many times more convenient, and packaged it up into a monthly fee. This took the company from about 23 million customers in 2011 to more than 200 million around the world in 2021. Adding 200 million customers is the same as signing up about two-thirds of the entire U.S. population.
What Netflix did for the video store, Blue Apron (NYSE: APRN) is trying to do for food. Blue Apron is a meal subscription service that delivers boxes of ingredients with cooking instructions to your door. Where Netflix’s initial value proposition was letting you skip the video rental stores, Blue Apron does the same by allowing you to skip the grocery store and recipe search websites.
However, it is also important to look beyond the business model to the financials. Blue Apron has struggled for profits, laid off a lot of workers, and watched its stock price fall during a period where Netflix has shown tremendous growth.
Still, while you might not want to sink your dollars into Blue Apron, there are some promising competitors in the meal kit delivery space also worth watching. While all of the subscription box companies may not survive, but it is likely at least a few will be breakout successes—just like Netflix.
Pay Attention to the Details in Stock Analysis
In many cases, professional investors are not looking for anything an amateur investor couldn’t find. The key to success is looking into both the finances and operations of a company to find one that is undervalued and ready to grow.
That is the basic premise behind value investing, the school of thought pioneered by Columbia professor and author Benjamin Graham and touted as the key to the success of Warren Buffett, one of the world's richest men.
If you can identify the next big stock before it breaks out, you’ll maybe on track to earning your own millions in the stock market. But one thing is certain: You can’t make it big in the stock market if you don’t take the time for thoughtful analysis around your favorite investing strategy.