A Recession Could Do NFLX Stock a Whole Lot of Good

Over the long run, low subscription costs will lift NFLX stock

By Josh Enomoto, InvestorPlace Contributor

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Like other capable tech companies with massive upside potential, Netflix (NASDAQ:NFLX) is primarily a victim of poor timing. At the end of September, NFLX stock was up nearly 91% for the year. But since then, shares of the popular content-streaming firm have dropped over 24%.

Conspicuously, Netflix stock was convincingly making up for the shortfall in its second-quarter 2018 earnings report. Although the company beat its consensus target for earnings per share, it disappointed in the subscriber department, particularly the domestic count.

As our own Vince Martin argued at the time, NFLX stock is a pure growth investment. In this environment, earnings metrics don’t quite matter. Netflix invests heavily in content so that it can create strong sub inflows. This strategy only works so long as customers open their wallets. But Martin wrote a cautionary note:

If it costs $8 billion a year just to keep existing subscribers happy, then Netflix really is just burning cash. NFLX will not be valued at $160 billion, or close, for very long if that’s the case.

Predictably, Netflix stock tumbled following the Q2 report. But fairly soon afterwards, shares started to rise. This wasn’t merely a technical phenomenon as the company enjoyed notable tailwinds.

First, Netflix won big at this year’s Emmys, taking on traditional entertainment-media providers in unprecedented fashion. Next, management made a shrewd business decision in acquiring ABQ Studios in corporate-friendly Albuquerque, New Mexico.

Add in positive results for its most-recent Q3 earnings report, and you have a veritable launching pad for Netflix stock. After all, the key to Netflix’s upside trajectory, sub growth, represented a huge highlight.

Unfortunately as I mentioned at the top, the markets had other plans. Still, I’m digging Netflix stock at these discounted rates for one under-appreciated reason: it’s recession-proof.

NFLX Stock Is Largely Impervious to Market Cycles

Admittedly, that’s a bold statement for a consumer-tech firm. During a recession, people jettison non-essentials. Moreover, NFLX stock has largely moved in tandem with the broader markets. That’s hardly evidence of the company being recession-proof.

Let’s address the latter point first. Resilience towards recessionary pressures doesn’t mean an investment won’t ever correct. After all, publicly-traded funeral homes are typically volatile despite the fact that death is inevitable.

Second, most folks are likely to perform a cost-benefit analysis during hardships. As Martin points out in his recent take on Netflix stock:

If anything, a U.S. recession might help Netflix’s subscriber numbers. Penny-pinching by consumers could accelerate cord-cutting, causing more consumers to subscribe to the service.

While Netflix is technically a cyclical, non-essential good, the company is levered towards an indispensable utility: internet access. Even if the labor market tanks, people must find ways to keep their internet subscriptions. Since the internet is practically the only medium through which modern businesses operate, not having it is a death sentence.

This benefits NFLX in that basic services are $8, and premium hardly breaks the bank at $12. If you’re already paying for internet, going an extra few bucks won’t hurt you, while the personal benefits more than make up for the cost.

But a standard satellite-TV service from Dish Network (NASDAQ:DISH) or AT&T’s (NYSE:T) DirecTV? You’re easily talking hundreds, if not thousands annually. The debate between Dish and DirecTV is comical because they both commit sleight-of-hand shenanigans to rack up your bill. I know because I’m a Dish customer.

Plus, a satellite-TV service requires investing in a separate asset (ie. a high-definition TV) to maximize the benefits. With Netflix, you can watch through your medium of choice.

Martin is spot-on: a recession would accelerate cord-cutting, eventually raising NFLX stock.

Don’t Ignore short-term Risk Profile for Netflix stock

As much as I’d like to say this is a wide-open throttle opportunity for Netflix stock, I must provide a cautionary note: the markets always have the last word.

I’m not trying to weasel out of a directional analysis. I am long-term net bullish on NFLX stock. But investors who fail to heed market signals and warnings invariably panic out when they’re slapped upside the head. As my colleague Dana Blankenhorn stressed, we’re in a bear market so respect it!

For Netflix stock, I’m concerned that bullish responses following negative trades are weak and unconvincing. NFLX stock, Netflix stockThe positive follow-up after Q3 lasted only one day. A brief rally that started in late October eventually failed. So can we trust the current spike in prices?

Near-term, I’m iffy where NFLX goes. A few years from now, I’m certain that shares are much higher. A month from now, my gut tells me that we’re likely to see further downside movements. I’m thinking somewhere between $200 to $220 before I’m 100% comfortable.

But that’s no guarantee that NFLX stock will drop that low. If you’re dead-set on acquiring a position, I’d take a small bite now. However, set aside the bulk of your funds for additional discount pricing.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/recession-nflx-stock-good/.

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