What do the pizza and big-box retail industries have to do with Netflix, Inc. (NASDAQ:NFLX) and the performance of NFLX stock going forward?
Surprisingly, a lot.
Domino’s Pizza, Inc. (NYSE:DPZ) recently got a boost from better-than-expected quarterly results. Meanwhile, Target Corporation (NYSE:TGT) is in a slump after disappointing Q4 earnings. DPZ is up more than 70% since the start of 2016, while TGT is down 20%. As weird as it may seem, the simple parallel between Domino’s recent success and Target’s recent failures underscores a secular shift in the consumer economy which strongly favors NFLX stock.
CNBC’s Jim Cramer is calling it the “stay-at-home economy,” and it’s showing up in everyone’s earnings reports. Companies — such as Domino’s and Netflix — that cater to this mentality are thriving; those that don’t are struggling.
Netflix stock hasn’t been the only big winner from this shift. Delivery-centric quick service food stocks like DPZ and Papa John’s Int’l, Inc. (NASDAQ:PZZA) are up big since the start of 2016. More traditional quick-service food stocks that don’t focus on delivery, like McDonald’s Coproration (NYSE:MCD), have struggled recently.
Non-store retailers and online marketplaces such as Amazon.com, Inc (NASDAQ:AMZN) and Etsy Inc. (NASDAQ:ETSY) have surged. Meanwhile, traditional retailers like Wal-Mart Stores Inc (NYSE:WMT) and Macy’s Inc (NYSE:M) are rapidly changing their business models to stay relevant.
In a nutshell, though, that is the problem with staying long the stocks that have been early winners of the “stay-at-home” shift. Everyone is catching on, and most are catching up.
In the food industry, services like Postmates are gaining popularity, and that is democratizing food delivery. In retail, all mall retailers are focused on building out an omnichannel presence, and free shipping is becoming more of a regular. Competition for services in the “stay-at-home” economy will only intensify.
With one exception: Netflix.
Why Netflix Is Different
In many ways, Netflix pioneered the stay-at-home economy. In 2011, the company split its DVD rental and streaming services. Consumers weren’t pleased, and about 800,000 members quit Netflix.
The dissatisfaction was short-lived, though, as consumers began to realize they could access a robust entertainment library from their couch for an affordable monthly fee. Over the next several years, Netflix dramatically grew its user base, NFLX stock soared, cord-cutting became the thing to do, and everyone started moving to over-the-top content.
As everyone moved to OTT, Netflix’s competition began to stiffen. Investors began to question the company’s competitive moat. Netflix’s response was to spend big on original content. That big spend, though, weighed on earnings. With competition up and earnings down, Netflix stock flat-lined for most of 2016.
Until the Q3 report.
The original content slate of Stranger Things, Narcos and Marvel’s Luke Cage during the summer of 2016 drove exceptional sub growth. The Q4 report showed just as much promise on the original content front.
Today, Netflix has almost 94 million members and is growing with exceptional pace considering the scale of the business. In other words, even several years after its pivot to streaming and many new competitors later, Netflix remains the premiere service in the streaming video on demand marketplace.
Bottom Line on NFLX Stock
Yes, Netflix stock trades at an absurdly high trailing price-to-earnings multiple, but that multiple doesn’t capture the extent of Netflix’s value.
The international growth story is just getting started. Original local content across the globe is bolstering international sub growth. That market is much larger than the domestic one. The early success of Netflix’s original content continues to widen the company’s moat. Higher quality original content allows for higher unit revenues (or ARPU). Higher unit revenues allow for higher margins. Overall, big sub growth plus higher unit revenues should lead to not only outsized revenue growth, but outsized earnings growth as well.
Netflix made staying at home cool. The market for providing services in the “stay-at-home” economy is getting more and more crowded. Netflix, however, seems to be immune to this competition.
Netflix remains the premiere service in a secular growth space, and Netflix stock remains a must-own in a hot market.
As of this writing, Luke Lango was long NFLX.
