Netflix, Inc. (NASDAQ:NFLX) stock has climbed 178 percent so far, which is the best performance in the Standard & Poor 500 stock index. However, to keep the trend going, the streaming company needs to follow the footsteps of Amazon.com, Inc. (NASDAQ:AMZN) rather than of HBO, says a report from The Wall Street Journal.
Paid domestic streaming subscriber base for Netflix, Inc. (NASDAQ:NFLX) surged from 25.5 million to 28 million in the early 2013 and 22 million in the previous year. It is just a bit away from Time Warner’s HBO. Domestic streaming margin of Netflix based on contribution profit after deducting the cost of sales and marketing was 20.5 percent in the first quarter, an increase from 14.3 percent in the previous year.
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Netflix must focus on subscriber base
Netflix may however, be at risk by increasing its margins. Investors would want to know the expansion in the subscriber base during the second quarter result on July 22. Enhancing the subscriber base will require the company to shell out more money.
Netflix, Inc. (NASDAQ:NFLX) should focus more on enhancing its subscriber base rather than expanding its margins. The video streaming company will be able to spread the cost of buying and bring out new content by expanding the subscriber base. It will further be able to increase its subscriber’s fee once the market share increases.
Netflix now cautious with content
Shares of Netflix have surged fueled by the expenditure that the company incurred on acquiring content in late 2012 and early 2013, according to Janney Capital Markets. Netflix bought the content from Walt Disney and Time Warner by paying them millions of dollars. The investors were skeptical about Netflix spending back then, but the deals have helped in increasing the customer base.
However, even after a multitude of deals, which Netflix, Inc. (NASDAQ:NFLX) did, it does not look confident about investments ahead. In April, Netflix announced that it will reduce the pace of content and marketing costs compared to revenue. It will further keep on expanding its margin around 1 percent per quarter in the United States.
Netflix is now choosing the content with much care unlike before. It is looking forward to making deals with only high quality programming. Netflix, Inc. (NASDAQ:NFLX) will not pay much for the old contents unlike it did before. Additionally, it is seeking to capitalize and spend around $2 billion plus annual budget on shows like “House of Cards,” “Arrested Development” and its latest, “Orange is the New Black.”
Analysts are of the view, being too HBO like will require a lot of spending from Netflix, Inc. (NASDAQ:NFLX), and even the margins will be tested. So, it will be better for the company to follow Amazon.com, Inc. (NASDAQ:AMZN), by seizing on a potential opportunity. Amazon was quick to tap the potential world of kids programming where Netflix previously enjoyed a dominant position.