Netflix (NFLX +1.53%) has had something of a comeback year. After losing subscribers in fiscal 2022, the company made significant strategy adjustments and, as a result, has seen both its customer numbers and stock price climb. But where might Netflix and its shares go over the next two years? Let's break it down.
Prices and churn are on the rise
There's no escaping it; the cost of subscription video-on-demand (SVOD) services is going up. Netflix, Comcast's Peacock, Apple's Apple TV+, Paramount Global, and Walt Disney's Disney+ have all seen fee increases within the last year -- or will in the coming months.
According to an S&P Global Market Intelligence report, U.S. households are spending on average about $30 a month on SVOD platforms, which is close to double the amount they were spending in 2018. And considering a Deloitte study earlier this year showed an annual increase in streaming churn rates -- in part because of higher costs -- it's likely that trend will continue for a while yet.
NASDAQ: NFLX
Key Data Points
Gaming out how customer cancellations will affect the industry over the next two years is challenging, particularly as much of it will likely come down to which streamers produce the content that people want to see. But considering Netflix has more than 75 million customers across North America -- outpacing Disney+ by approximately 30 million -- it's likely to hold its place as the most popular streamer for the foreseeable future.
A push into gaming
Despite Netflix's popularity, the company is still vulnerable because it is exclusively an SVOD operator. (The streamer has started shutting down its legacy DVD-by-mail operation.) By contrast, Walt Disney, Comcast, and Warner Bros. Discovery have more diverse revenue streams, earning income from alternative businesses like theme parks and record labels, among others.
In late 2021, Netflix announced a move into video games. The initial rollout took the form of mobile titles that could only be played by gamers with a Netflix subscription. At the time, Netflix founder Reed Hastings (then co-CEO) noted the company was "unafraid to fail." Indeed, by some metrics, that's what was happening: A report last summer showed Netflix's games had been downloaded by less than 1% of its user base.
Despite the struggle, Netflix executives have continued to talk about video games as a key component of the streamer's future. And to that end, Netflix is beginning to marry its streaming knowledge with its video-game catalog.
Netflix's cloud-gaming gamble
Cloud gaming -- the technology that lets gamers play titles over an internet connection rather than via a PC or console -- is nothing new. OnLive launched in 2010, and since then, companies such as Alphabet's Google, Microsoft, and Amazon have all tried their hand at cloud gaming with mixed results. OnLive and Google's Stadia are no longer around, but Amazon's Luna and Microsoft's Xbox Cloud Gaming have managed modest success.
Broad opinion across the gaming sphere is that cloud gaming is yet to truly take off, in part because of the input lag that gamers can experience. It can be caused by everything from network interference to overloaded servers, but for the most committed players, such struggles can be enough for them to turn back to PCs and consoles. But this is where Netflix may have spotted an opening.
Netflix has recently started testing its own cloud offering, giving some gamers in the U.K. and Canada the ability to stream Oxenfree and Molehew's Mining Adventure to their smart TVs, PCs, and Macs. And unlike triple-A games typically offered by cloud-gaming rivals, Netflix's games are much less graphic intensive and don't require a dedicated controller as they can be controlled via a smartphone.
While Netflix's entry into cloud gaming is just a beta test right now, should things work out, the company has a whole batch of casual mobile games that could, theoretically, make the transition to streaming. Should that happen within the next couple of years, Netflix's cloud-gaming offering could be the kind of value-add that subscribers warm to, thereby making the company's subscriptions less vulnerable to churn.
The long-term bet
The streaming space has become saturated in recent years, meaning growth will be harder to come by. But Netflix's decision to get into the emerging cloud-gaming arena could prove prescient. Of course, gaming hasn't made a big difference to Netflix's bottom line so far, so uncertainty remains. But if Netflix can continue to innovate and -- to paraphrase Hastings -- not fear failure, then stakeholders may well benefit from the company's boldness.
According to Grand View Research, the video game industry was valued at $217 billion in 2022, and is projected to see a compound annual growth rate of just over 13% by 2030. With that kind of uplift, Netflix could certainly capitalize over the next couple of years, and its share price should climb a several points accordingly.
Market watchers would do well to see what Netflix does next with its move into cloud gaming. If the company expands testing into more territories and adds more titles soon, then take that as a sign that it's seeing the right signals from cloud gaming.
