You’re tired, you’ve just finished an exhausting day at work and all you want to do is relax. So, what do you do? You kick your feet up, switch on a screen, and this beautiful red symbol appears, allowing you to be amused by the world’s best entertainment all night long. I am talking about the daily Netflix ritual.
Every day the average Netflix subscriber spends at least 2 hours laughing, smiling and hovering over the next episode button with uncontrolled anticipation.
Are you one of those people? If not, you could find yourself joining the 150+ million Netflix subscribers in the coming weeks. Why? Well, with the “you know what” forcing us to cocoon ourselves at home the temptation to watch Netflix is going to be hard to resist.
Despite the coronavirus beating up some of the world’s most high-flying tech stocks, such as Apple (NASDAQ: APPL) and Microsoft (NASDAQ: MFST), Netflix (NASDAQ: NFLX) appears to be in a perfect position to profit. It’s a bit strange, right? An online streaming service company surging amidst a global pandemic. Let’s discuss this hot topic and whether there really is an opportunity for investors?
Is Netflix surging during the coronavirus – if yes why?
You don’t have to look much further than last week’s performance on both the NASDAQ and Netflix to find the answer. While, the NASDAQ plunged by another 1% Netflix grew by an impressive 11%.
In a nutshell, the coronavirus fear is causing the world’s population to live behind closed doors. Whether it be because of healthy people wanting to avoid the virus, infected people being quarantined or even just the government’s lockdown techniques leaving us no other option other than staying at home.
With millions to potentially billions of people being housebound, there is a high chance that these people will be watching Netflix. Also signing up for Netflix could be on the ‘to-do list’ for many households without a subscription. Moreover, people could flock to Netflix to make life more bearable in these doom and gloom times. Ultimately, causing Netflix subscriptions to potentially go through the roof.
The stock market is based on one thing, expectations. Therefore, it comes as no surprise that investors are rallying behind Netflix. Because the expectation is that an explosive surge in subscribers will generate a massive increase in revenue.
Now you might be thinking well obviously an influx in subscribers is going to trigger revenue growth. However, if you understood Netflix’s’ cash expansion cycle then the significant benefits of more subscribers would become clear. So, let’s break it down.
Netflix invests its subscription revenue into creating more content. Epic content leads to more subscribers and thus more revenue. Allowing the management to reinvest in even more content, leading to more subscribers. Netflix’s rapid growth over the past few years, 2019 especially, is due to its cash-expansion cycle. Thus, making the expectation of a titanic wave of subscription revenue crucial for Netflix’s success and strong financials in June 2020.
Is there a possible Bearish scenario ?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Despite what appears to be a perfect opportunity for Netflix we must keep a balanced perspective.
Laura Martin, Needham analyst, has brought the contrarian view to the table. Martin expressed the need for investors to focus on the subscription number instead of how many hours people spend on Netflix. Because, once the person subscribes it does not matter how many times they binge-watch the office their access remains unlimited.
Moreover, Netflix was banking on strong sales from the international markets to drive up its financials in 2020. Especially, as the US and Canadian markets are close to saturation.
However, with the coronavirus infecting the global economy Netflix could experience a significant drop in expected subscriptions and an increase in users cancelling their contracts.
To add insult to injury, Netflix’s Q1 performance was short of expectation. With Netflix reporting 7 million subscribers instead of the forecasted 8.88million.
Thus, if the coronavirus impacts Netflix’s customer base we could see a bearish scenario play-out for the streaming giant.
Is Netflix worth the investment ?
At this stage, you might feel like the ground is splitting underneath as you don’t whether to believe the bearish or bullish forecast.
The polarisation becomes extreme in the scenario we go into a recession.
On the bullish side, you have the argument that Netflix is still well-positioned irrespective off the macroeconomic conditions. Even if unemployment increases, more people at home could see Netflix’s subscriptions surge. Especially as the service only costs $12.99 per month US.
However, the bearish side sees the economic downturn striking a blow to Netflix. In which, subscription revenue only increases sightly, cancellations rise as people have less disposable income and the threat of Disney + service grows stronger.
Personally, the uncertainty around Netflix’s subscription and cancellation levels during the coronavirus makes me think the risk is just not worth it. However, in saying that Netflix is up 17% over the past seven days (at the time of writing).
Highlighting how the current market is leaning towards the bullish forecast. How long will that last and how quickly could the expectation go from a titanic wave to only a small ripple is a question every investor must consider.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG.