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Netflix, Inc. (NFLX) Alibaba, LeEco, and China: Sorting The Facts and Rumors

DataTrek Research

Netflix, Inc. (NFLX) investors were losing faith in the stock in mid-July after the firm reported lower than expected subscriber numbers in the second quarter. As investors were about coming to terms with the weak user numbers in the Q2, news broke that the firm might lose market share as new rivals emerge and former rivals join forces in the U.S video streaming market.

Netflix Inc, (NFLX)

A cursory search for “Netflix” in the news streams will yield a torrent of result with much ado about how rivals are coming for the firm’s jugular. Sadly, the stock lost 5.61% in July as investors react to all the facts, rumors, and misinformation about the firm. This piece seeks to provide some clarity into the haze surrounding the U.S. streaming giant, its market lead, its strategic alliances, and the banding together of its rivals.

LeEco bought Vizio to break into the U.S. market

Investors woke up to troubling news on July 28 when it was reported that China’s LeEco has acquired U.S. Vizio in a $2B deal. LeEco’s acquisition of Vizio provides the Chinese firm with an entry point into the U.S. on-demand video streaming market.

LeEco owns owns a video streaming unit called LeTV and Vizio sells TVs with a 20% market share in the U.S. Hence, Netflix investors have legitimate reasons to be concerned because LeEco can leverage Vizio’s 20% market share in the US TV market to launch LeTv in the U.S. market. However, LeEco execs have hinted that they plan to capture the Chinese audience in the U.S.; hence, the firm might end up as a niche player here.

Netflix has a deal with LeEco to break into China

As LeEco tries to break into the U.S. market, Netflix is also making smart moves to break into the Chinese market. Reed Hastings’ firm is reportedly in talks with Chinese LeEco over a content cooperation deal that will be announced next month. Reed Hastings’ firm has been trying to get a foothold in China without much success because of Beijing’s draconian rules on online content. However, a successful deal with LeEco could provide the firm a smoother ride into the world’s most populous country.

Pundits have observed that the deal with LeEco is likely to be a joint venture that would allow it to stream its content in China. Liu Hong, co-founder and vice chairman of LeEco saya “We are planning a very significant cooperation with Netflix, and details will be announced in the third quarter.” The fact that Netflix is making a stronger push into China at the same time that LeEco is heading into the U.S. suggests that both firms would eventually work out a compromise that would be a win-win situation.

Alibaba is not buying Netflix

While Netflix’s stock was being pummeled by weak subscriber data and increased competition for market share news broke that Chinese giant, Alibaba  has plans to acquire Netflix. The news about Alibaba’s interest broke on Friday morn and investors rushed out in droves to add NFLX to their portfolio. As at market close last Friday, the stock was up 3.84% to end the session at $97.03.

However, Alibaba has come out to debunk the rumors and the Chinese giant says it doesn’t have any plan to acquire Netflix or buy a stake in the firm. Alibaba spokesman Bob Christie told Reuters that the firm plans to launch a video streaming service in China and North America sometime in the future but an acquisition is not in the works right now.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.