Netflix is a shining star among Silicon Valley and technology stocks. It recently passed $100 billion in market capitalization, and its stock price has grown more than 1,900% since 2013 ($25 in 2013 to more than $500 in July 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 poised to follow a similar path.
With that in mind, examine three of the biggest reasons for Netflix’s success, and consider what other companies might share those traits.
- Netflix provides a service that is scalable by providing what consumers want over and over again.
- Netflix uses data-driven marketing to keep its existing customers by recommending similar content.
- Netflix continues to deliver what consumers want and need by inventing methods to meet their changing needs.
- When you're analyzing a stock, look for these factors, and decide whether the company can continue to meet consumer desires using the finance structure and operations model.
Find Companies With Scalable Services
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 it focuses 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.
Find Data-Driven Marketing to Existing Customers
Netflix was a pioneer in marketing to existing customers, and its 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 your monthly subscription fees.
As artificial intelligence and machine learning continue to improve, data-driven marketing will keep getting better.
Netflix is by no means alone in using data to keep existing customers engaged. Amazon, for instance, uses similar techniques for advertising products to existing customers based on their shopping preferences. However, the predictive models of Netflix proved to be more effective than Amazon's. Interestingly, Netflix's predictive model was the product of a $1 million Xprize opened to the world community to develop the best product for Netflix.
Of course, Amazon has its won strengths and has already seen huge growth, and part of successful investing is identifying new companies that have seen huge growth, and part of successful investing is identifying new companies that still have major growth ahead.
One newer company that uses similar advertising methods on 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.
With the knowledge of what you already like, Stitch Fix is in a great position to convince one-time customers to become repeat buyers.
Find Companies That Make It Easier for Consumers
Video stores have been around since the 1970s, and the 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 26 million customers in 2011 to more than 200 million worldwide in 2021. Adding 200 million customers is the same as signing up about two-thirds of the entire U.S. population.
Blue Apron (NYSE: APRN) is trying to do the same thing for food that Netflix did for the video store. Blue Apron is a meal subscription service that delivers boxes of ingredients with cooking instructions to your door. However, where Netflix’s initial value proposition was letting you skip the video rental stores, Blue Apron allows you to skip going to the grocery store and searching for recipes.
It is very important to look beyond the business model to the financials. Companies can appear to be doing well but might not be managing their finances well enough to survive market downturns.
Blue Apron has struggled for profits, laid off many 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 that are also worth watching. While all of the subscription box companies might not survive, it is likely that 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 to look 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 might be on track to earn 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 that complements your investing strategy.