4 Reasons For Investor Confidence In Netflix's $12B Content Investment

As Netflix, Inc. NFLX plans to spend $12 billion in content development, a number of investors have expressed concern over the effectiveness of such a large-scale investment.

Netflix’s recent original content successes demonstrate that the company is able to utilize its brand image to capture viewers, reach international audiences and invest in top-level creative efforts to yield quality content, according to Bernstein. 

The Analyst

Bernstein's Todd Juenger maintained an Outperform rating on Netflix and raised the stock’s target price from $302 to $340.

Brand Image 

The release of 2017’s “Bright” demonstrated the “halo effect” of the Netflix brand, Juenger said in a Friday note. (See the analyst’s track record here.) 

While reviews from critics trended negative, audience reviews were overwhelmingly positive, Juenger said. 

“We think the positive association with the Netflix brand causes Netflix members to be predisposed to have a positive view of Netflix content. In other words, they go into a Netflix show expecting to like it.”

While “Bright” would have very likely flopped at commercial theaters, the platform on which it was released leads audiences to view and judge it differently than films released in theaters, Juenger said. "[Viewers] found it a fun, guilty pleasure, something different and bite-sized, with a big Hollywood star and some special effects that they could watch with their date, or spouse or family some weekend evening — for 'free.'"

Language Barriers Are Not A Barrier

“Dark," Netflix’s first hit German-language series, found strong viewership worldwide — including the United States — and it is estimated that over 90 percent of viewership came from outside of Germany, Juenger said.

This demonstrated that viewership of local language content is not limited by the number of Netflix users who speak the local language, the analyst said. 

“The return on the investment is no longer calculated based on the number of German subscribers [that] can be attracted and retained by a body of German-language content. The content is now also generating a return across the entire world.”

Investing In Talent

Netflix’s recent agreements with industry leaders, including a $275-million, five-year deal with Ryan Murphy, demonstrate that the company is investing largely in creative ability, a key driver of content success, the analyst said. 

This represents the most efficient area for Netflix to allocate a large portion of the $12 billion investment, Juenger said. 

“What would a Netflix investor prefer — overspending millions of dollars on creative executives like Ryan Murphy and Shonda Rhimes, or underspending on creative leadership when you're trying to efficiently deploy $12 billion of content investment?”

Winning Awards

The Oscar win for "Icarus", along with nominations for several other Netflix productions, could show that Netflix's strategy of investing in creative talent is effective and the company's priorities are solid, Juenger said. 

"They want to put their work on the platform where it has the best chance of being commercially successful and winning awards. Netflix has the former. Increasingly, it also has the latter." 

Price Action

Netflix shares were up 2.82 percent at $325.93 at the time of publication Friday. 

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Photo courtesy of Netflix.