Shares of top video streaming giant Netflix (NFLX) have finally recovered the massive ground it lost during the brutal sell-off of late 2021 and early 2022, losing 73% of its value. At the peak of its fall, it seemed like Netflix’s business model was collapsing, as the threat of new rivals and stalling growth had many throwing in the towel. New growth drivers, such as the firm’s video game plans, could fuel new highs for a stock that could stage a breakout in a rather wobbly economy.
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Video gaming is a tough business to compete in. However, if a tech-savvy firm can execute and disrupt a new market, it’s Netflix. For this reason, I’m staying bullish on the stock, even as the valuation starts getting just a bit frothy again.
Netflix Shares Look Fully Valued Again
The first important factor in my bullish sentiment concerns NFLX’s valuation. At the time of writing, shares of NFLX trade at 42.9 times, trailing price-to-earnings (P/E). That’s quite rich for a mega-cap firm that may lack the durable competitive advantages boasted by its Magnificent Seven rivals.
On a forward-looking basis, however, shares of Netflix trade at a somewhat more palatable but still premium 37.1 times forward P/E. Undoubtedly, even if the company continues gaining subscribers with its unmatched pipeline of hit content (Squid Games: Season 2 is coming), the company needs to tap into new markets (notably, video gaming) if it’s to keep its growth rate at a level that’s to justify its more than 40 times P/E multiple.
Netflix’s Entering the Video Games
Of course, video gaming is a notoriously expensive and challenging market to compete in. The modern gaming landscape is more of a “winner takes most” environment, whereby many live-service games capture a massive chunk of user engagement and bookings while most other games fizzle shortly after they launch.
Indeed, there will always be a market for traditional and casual games, such as the ones Netflix currently offers its subscribers for free. However, if Netflix wants to make noise (especially in its early foray into the gaming waters), taking a chance on a big-budget production could be worth the risk.
As Netflix continues building its video-gaming talent pool, I’d argue that it’ll be better equipped to tackle larger, more ambitious gaming projects to help take its growth to the next level. On the talent front, in July, Netflix scored an industry legend when it brought on a seasoned veteran, Alain Tascan, from Fortnite-maker Epic Games. This is a coop that makes me confident about NTFX prospects.
The Hiring of Alain Tascan
Bringing on Mr. Tascan as president of the games division is a massive win for Netflix, and it sets its gaming business up for success. Mr. Tascan reportedly has more than 30 years of experience in game development, production, licensing, and studio-building. That’s a wealth of experience necessary to build a robust gaming operation from the ground up.
As Mr. Tascan brings his decades of experience to the firm, I wouldn’t discount Netflix’s ability to significantly tilt the risk-reward trade-off in its favor.
Undeniably, many video gaming projects tend to take longer and cost more. However, while Netflix has the production budget, it needs to better understand gaming before it can make a bigger splash. I think the slow and steady pace may be what ultimately helps Netflix gain in the race over the long run.
Ultimately, industry legends like Mr. Tascan could help mitigate the risks and improve the odds of scoring a decent return on investment even before a project can hit the ground running.
Netflix to Get More Aggressive on Gaming
Expanding into video games is the prime catalyst of my bullish position, so it will be interesting to see where Netflix takes its gaming strategy under Mr. Tascan’s leadership. The firm is looking to expand its library of more than 100 mobile and television games while exploring potential and keeping an eye out for studio acquisition opportunities.
In recent years, Netflix has been on quite the gaming M&A spree, buying Spry Fox, Next Games, and Night School Studio. I don’t expect the pace of deal-making to stop. Furthermore, Netflix may acquire or team up with target bigger-budget studios as it seeks to take its gaming growth into overdrive.
The company’s recent collaboration with Ubisoft (UBSFY) to bring the three Assassin’s Creed games and one live-action series to the Netflix lineup is intriguing. The show’s success could translate to success in the games and vice-versa. Either way, I’m a big fan of the unique angles Netflix has undertaken to push into gaming.
Wall Street’s Take on Netflix Stock
On TipRanks, NFLX stock is a Moderate Buy. Out of 37 analyst ratings, there are 24 Buys, 12 Holds, and one Sell recommendation. The average NFLX stock price target is $704.97, implying an upside potential of 2.66%. Analyst price targets range from a low of $545.00 per share to a high of $800.00 per share.
The Bottom Line on NFLX Shares
If Netflix is to keep growth elevated, it needs to level up on the front of video games. Fortunately, Netflix has been taking all the right steps to lay a strong foundation for the firm before making even bigger moves. In recent quarters, the firm has really brought on a great deal of talent.
Whether we’re talking about the addition of industry veteran Alain Tascan or the tremendous talent from recently acquired game studios, it’s a mistake to view Netflix as punching above its weight in gaming. Arguably, Netflix may have the edge as it plays slow starts to win the long game. Given this, I’m incredibly bullish on the firm as it looks to games to supplement its video streaming business.
