Netflix, Inc. (NASDAQ:NFLX), Tesla Motors Inc (NASDAQ:TSLA) and SolarCity Corp (NASDAQ:SCTY) couldn’t be more different in their business plans. Nonetheless, The Street’s Antoine Gara suggests that Netflix could learn a lot from the strategy employed by Elon Musk at Tesla and SolarCity.
Could Netflix use a capital raise?
The main element of Musk’s strategy which Gara focuses on is the capital raises both of Musk’s companies had this year. Both Tesla Motors Inc (NASDAQ:TSLA) and SolarCity Corp (NASDAQ:SCTY) must continue to innovate quickly, so they’re running through a lot of capital very quickly. Nonetheless, investors have rewarded both companies with their innovations and have chosen to ignore the dilution caused by those capital raises.
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According to Gara, Netflix, Inc. (NASDAQ:NFLX) is in a position that’s similar to Tesla and SolarCity because it is also an innovator in its industry. Also Netflix is facing off with companies that have much deeper pockets, like Amazon.com, Inc. (NASDAQ:AMZN). But innovation may be the only thing the companies have in common.
Netflix runs on razor-thin margins
Netflix has posted significant gains over the last year, and its stock is now hovering right around its all-time high. Who could have guessed that in just a year, Netflix shares would soar from around $100 up over $300?
It’s all about the strong growth the company has reported over the past year, but Gara notes that the company’s margins are razor-thin, which leaves CEO Reed Hastings with very little room to make mistakes.
Some concerned about Netflix’s content costs
Gara notes that because of Tesla Motors Inc (NASDAQ:TSLA)’s capital raises this year, it was able to speed up production, thus raking in more money than expected to consistently beat expectations this year. The deeper Tesla’s pockets are, the more quickly it can churn out vehicles.
With Netflix, Inc. (NASDAQ:NFLX), however, the story might be a bit different. He suggests that the company should speed up its investments into original programming in order to win more and more subscribers over. However, content costs have been one of the biggest concerns posted by analysts. Those concerns haven’t been voiced as loudly recently because of the success of Netflix’s series, but they still remain. How would investors react if Netflix were to increase spending on its original shows?
How Netflix’s situation differs from Tesla’s
That one’s a bit harder to gauge than Tesla’s situation because it was already clear that Tesla had a waiting list for its vehicles. The automaker just needed to speed up production so it could bring in payment for those vehicles more quickly. Netflix, however, must convince subscribers to sign up because of its original series, which can be a more difficult proposition. The company doesn’t have a clear waiting list for subscribers, so it will be tougher to gauge just how well increasing content costs would help bring in subscribers. Also there’s always the chance that a show could bomb, and since Netflix, Inc. (NASDAQ:NFLX)’s margins are so thin, this could be devastating to the company.
Netflix would do better to increase its margins
I’m not sure raising capital to rapidly increase content spend would be such a great idea for Netflix, but it would help to have a little extra in the bank just in case something goes wrong. Perhaps a better strategy would be a very small price increase. I would think the company could raise prices from $8 per month to $10 per month without losing too many subscribers while probably still growing its net subscriber base.
Some analysts have argued against this in the past, but as the value Netflix provides increases, I think $2 more per month would be acceptable by most subscribers. The company could even test out a price increase by raising it a dollar to see how that affects things.