Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Netflix Turned Gaming Into a Retention Engine
Transcript
- Lucas: Netflix added nearly 8 million subscribers last quarter, but the number I can't stop thinking about is this: over 100 million game downloads since they launched mobile gaming in late 2021. Luna: That's a lot of people tapping into something that isn't a TV show or movie. But do they actually play, or is it just a curious download and done? Lucas: Good question. Netflix doesn't break out engagement metrics the way they do for viewing hours, but third-party data from firms like Apptopia suggests that monthly active users for Netflix games have grown from about 2 million in early 2022 to roughly 15 million today. That's still a fraction of their 280 million global subscribers, but the trend line is climbing. Luna: And this isn't just about revenue from games—Netflix doesn't sell in-app purchases or charge for them. It's purely a retention play, right? Lucas: Exactly. The thesis is that if a subscriber starts playing a game inside the Netflix ecosystem, they're less likely to cancel. Netflix has said internally that game players have a noticeably lower churn rate—some analysts estimate 20 to 30 percent lower. And in a market where subscriber growth is slowing, retention is the new growth. Luna: So what kind of games are they offering? I know they've licensed some big titles, but also acquired studios. Lucas: Right. They started with small casual titles, but in the last 18 months they've pivoted to bigger names. The biggest was the mobile version of 'Grand Theft Auto: San Andreas,' which launched on Netflix in late 2024. That alone drove a huge spike in downloads. They also bought the studio behind 'Oxenfree'—Night School Studio—and a few others. And they've got a 'Squid Game' multiplayer game coming later this year, which could be massive given the show's popularity. Luna: And the cost? Licensing a game like GTA isn't cheap, but compared to producing a big-budget TV series, it might be a bargain if it keeps people paying $15 a month. Lucas: That's the key math. Netflix's content budget this year is around $17 billion. Gaming is a small slice—maybe $1 billion in licensing and development costs. But if that billion dollars reduces churn by even 5 percent across their subscriber base, that's worth over $2 billion in annual retained revenue. And that's before you factor in the higher lifetime value of those subscribers. Luna: So the return on investment could be significant. But how does this compare to what Disney or other streamers are doing? Lucas: Disney's approach has been different—they license their IP to external game developers and take a royalty, but they haven't built a dedicated gaming platform within Disney+. They've talked about it, but it's not live. Netflix's advantage is that they control the full stack: the app, the recommendations, the data. If a user plays a game, Netflix knows what shows they watch and can cross-promote. That's a data moat that's hard to replicate. Luna: And they're not just targeting hardcore gamers. The games are designed to be accessible to a mass audience, which fits the Netflix user base. Lucas: Absolutely. Take 'Oxenfree'—it's a narrative-driven adventure game that feels like an interactive movie. You can finish it in a few hours. It's perfect for someone who's already on the couch with their phone or tablet. Netflix's head of games, Mike Verdu, has said they want to create 'the Netflix of games'—a place where you can discover and play without friction. Luna: So from a stock-picking perspective, how do you value this? It's not a separate revenue stream, so it's not like adding a new line item to earnings per share. Lucas: You have to model it through retention. Take Netflix's current subscriber base and assume a 5 percent lower annual churn rate. That adds about 14 million subscribers that you wouldn't have otherwise. At an average revenue per user of about $15, that's over $2.5 billion in annual revenue that drops almost entirely to profit. Apply a conservative multiple, and you're looking at $15 to $20 per share in incremental intrinsic value. That's not nothing for a stock trading around $620. Luna: And if they ever decide to monetize games directly—say, a premium tier with exclusive titles or in-game purchases—that could be another lever. Lucas: Right. But for now, the smart play is retention. And I think the market is underpricing this because it's hard to measure. You don't see 'gaming' in Netflix's earnings release in bold letters. But if you look at the trend in engagement data, it's clearly working. Luna: Let's talk about risks. What could go wrong? Players could get bored, or the cost of licensing big titles could escalate if other bidders enter the space. Lucas: Two big risks. One: mobile game fatigue is real. The average mobile gamer churns out of a new game within seven days. Netflix has to keep the content pipeline fresh, which means ongoing investment. Two: if Apple or Google change their app store policies—for example, requiring all in-app purchases to use their payment systems—it could complicate Netflix's ability to bundle games without giving up a cut. But so far, they've avoided that by not having in-app purchases at all. Luna: And competition from other streamers? Amazon has Prime Gaming, but it's a separate offering. Apple Arcade is a subscription game service, but it's not tied to Apple TV+ in the same way. Lucas: Amazon is probably the most direct competitor—they bundle gaming with Prime, but it's more about giving away free games than creating an integrated experience. Netflix's advantage is that the games live inside the same app as the shows. That's a very sticky combination. Luna: So for a concentrated portfolio, you'd consider Netflix not just as a streaming company, but as a platform that's building a retention moat through gaming. It's a different lens. Lucas: Exactly. And it's the kind of nuance that can give you an edge if you're doing deep fundamental research. Most analysts still model Netflix on subscriber adds and content spend. But the retention dynamics are shifting under the surface. Luna: Speaking of deep research, a lot of what we discuss here comes from digging into numbers and reading between the lines of earnings calls. If our money conversations have helped you think about a decision differently—whether it's looking at a stock like Netflix or just being more curious about how companies build moats—a couple of dollars a month is genuinely what keeps these going. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small thing that makes a real difference. And it keeps the show independent and ad-free, which we love. Back to Netflix—one thing I want to circle back to is the timing. This gaming push started in 2021, but it's really hitting its stride now. The 'Squid Game' multiplayer game later this year could be a catalyst that brings more attention to the whole strategy. Luna: And if it works, it could force competitors to respond. That would validate the thesis and potentially lift the whole sector. Lucas: Absolutely. So if you're looking for a non-obvious angle on Netflix, watch the game download numbers and the churn rate. Those two metrics will tell you whether this is a real moat or just a side project. For now, the data says it's working.