Netflix has been at the center of two of the most lucrative deals in the past 12 months.
Earlier this year, the market noticed it could make money from the falling shares of the streaming giant. It became a favorite with short sellers during its more than 75% decline from peak to trough.
At the same time, however, Netflix facilitated the popular trade in “Korean dramas”. The gains from this strategy suggest that Netflix’s short selling may be overdone.
The strategy is simple: when a new drama series starts on Netflix, watch the first episode. If you think it has the makings of a hit, buy shares of the production house in the open market the next morning. South Korean drama series are usually 16 episodes long and run for eight weeks. If the streak continues to be as good as it initially looked, hold it for about four weeks – when stocks typically peak. If the twists disappoint, sell early.
Take, for example, the latest Korean hit on Netflix – Extraordinary Prosecutor Woo – a court drama starring an autistic lawyer and a photographic memory. The day after the first episode began airing on Netflix, shares of its production house AStory began a three-week rally in which they more than doubled.
This tactic can deliver consistent, albeit short-lived, outperformance. Similar gains followed previous successes such as Hell. Shares of ContentreeJoongAng, the company behind the fantasy horror series, nearly tripled after the first episode aired on Netflix. As for squid gamethe dystopian drama that became Netflix’s most-watched show, even the lead actor’s agency shares more than tripled after release.
Unlike stocks themselves, these gains have a stronger foundation in fundamentals. Local broadcasters, which have been making hit drama series for more than three decades, have largely standardized the production process, helping to keep costs down. squid gamefor example, cost less than a quarter of the American series stranger things produce per episode.
Operating profit tends to climb sharply after the launch of a new series. AStory’s grew sevenfold in the first quarter and now operates with 16% margins. Netflix, a relative newcomer to original Korean drama, may soon share the windfall as it begins producing its own more original local content.
He needs to be boosted. Its shares are still down 60% this year – despite a rebound that began in May – and it lost 970,000 subscribers in the quarter ending June. Its forecast for new customer additions is below expectations for the current quarter. Asia-Pacific is the only region where Netflix added subscribers, 2.2 million sign-ups in the first half, while losing customers in the rest of the world.
But apart from that, the biggest appeal is that the returns on its investments in shows in Asia are not limited to the region. While it’s rare to see US content in the top 10 lists in countries like Korea and Japan, squid game and Hell became the most-watched Netflix shows in the world within days of their release.
squid game, which cost around $21 million to make, would have created nearly $900 million in value for Netflix. The company’s shares and subscriber acquisition numbers surged after the show’s launch.
There is also room for growth. The Asia-Pacific region accounts for nearly half of the world’s video streaming subscriber base. At the same time, less than half of households in the region have a subscription, compared to more than three-quarters of American households.
Despite their closer ties to the local entertainment industry, broadcasters and streamers in the region are struggling to keep up with Netflix when it comes to global distribution, impact and streaming profits. Many are still loss-making due to rising content acquisition costs.
Netflix, on the other hand, is expected to end the year with $1 billion in free cash flow. This is expected to double by next year. Content remains the key to surviving the streaming wars. In this battle, cash is king.