Why Netflix's newest hit show could have big implications for investors (NFLX)

Netflix

Netflix’s new series “Stranger Things” is a monster hit.

It currently has a 94% Rotten Tomatoes critic rating, a 96% audience rating, and has sent the internet abuzz since it was released in mid July.

If you haven’t seen the show, it’s a supernatural sci-fi thriller that draws heavily from 80s movies and TV. Tech Insider’s Tim Mulkerin describes it like this: “Imagine putting ‘The X-Files,’ ‘Freaks and Geeks,’ ‘Twin Peaks,’ ‘Super 8,’ ‘It Follows,’ and ‘E.T.’ in one big giant blender.”

It’s nostalgia bait, done very well.

But Pacific Crest analysts Andy Hargreaves and Evan Wingren don't love it for that. They love "Stranger Things" because they think it proves that the Netflix model works.

In a note to investors on Tuesday, the analysts wrote that with “Stranger Things,” “Netflix has taken an idea and a project that was off the radar of most, and grown an audience at what is likely a small fraction of the cost per hour viewed of any other TV show to premiere this year.”

That has been Netflix’s pitch all along. It will identify those seemingly niche hits that can grab a worldwide audience. And sometimes those hits can dominate the cultural conversation.

Growth Driver

“Using search volume as an indicator, Netflix original series ‘Stranger Things’ is the biggest TV series to debut this year, and it's not close,” the analysts continued. “In fact, it is already one of Netflix's most-searched-for shows ever. A show that had limited explicit marketing, no huge stars (sorry, Winona), and likely a discount budget relative to other premieres dwarfed ‘larger’ debuts on traditional TV.”

It's no doubt that Netflix scored big with "Stranger Things." But the bigger question is whether Netflix is any better at identifying these sleeper hits than your average network.

Netflix will release an insane 600 hours of original programming this year, according to the company. That includes “The Get Down,” Baz Luhrmann's upcoming Netflix show that cost a whopping $120 million to produce, according to Variety. When the dust settles from that spree, we’ll see whether it was a cost-effective means of driving subscriber growth, which is the only statistic Netflix really worries about.

Netflix missed Wall Street’s subscriber growth estimates in both the US and international markets last quarter — badly. But the Pacific Crest analysts are bullish.

“Despite recent earnings hiccups, we believe this core efficiency advantage remains firmly in place and can drive global subscriber growth in excess of investors' current expectations,” they wrote.

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