Why Netflix Stock Still Has Plenty More Room to Run

Netflix’s (NASDAQ:NFLX) fourth-quarter results showed that the worries about Netflix’s competition were greatly overdone. Meanwhile, the company has multiple strong, positive drivers. Specifically, NFLX stock should benefit from continued domestic and foreign user growth, overseas macroeconomic growth, domestic price increases, slowing spending growth and, over the longer term, consolidation within the streaming sector.

NFLX Stock: Netflix Still Has Plenty More Room to Run

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After Netflix reported that it had added 550,000 net new paid customers in the U.S. and Canada in Q4, many investors and analysts realized that concerns about the company’s competition from Apple (NASDAQ:AAPL) and Disney (NYSE:DIS) had been extremely overdone. Also helping Netflix’s outlook in the eyes of the Street was the fact that the company’s global average paid memberships jumped 21% year over year, while its revenue surged 31% YoY.

More Americans will sign up for Netflix in the U.S. as cord cutting continues to accelerate. Also likely to boost Netflix’s subscriber growth, both in the U.S. and overseas, is the proliferation of Roku’s (NASDAQ:ROKU) very affordable and easy-to-use streaming TV devices. Further, as I will discuss below, multiple macro trends should enable Netflix’s overseas membership growth to accelerate.

And finally, as I’ve noted previously, worries about the company’s competition negatively impacting its user growth is overstated. That’s because Disney+ is primarily geared to children, while Apple TV+ has limited programming and Netflix has a huge first-mover advantage.

Overseas Economic Growth and Price Hikes

A Seeking Alpha contributor recently pointed out that internet penetration in Asia is less than 55%. In Latin America and the Middle East, less than 70% of consumers have internet access, while the rate in Africa is less than 40%, according to a chart from internetworldstats that the contributor posted. Moreover, the columnist pointed out that internet usage remains prohibitively expensive in many developing countries, while Netflix charges extremely low prices in some nations.

But as many developing economies continue to grow rapidly, this situation should improve. Many more people in those economies will get internet access. Moreover, internet usage costs will drop in developing countries as their technology improves and the number of people who can afford to pay for internet usage increases. Finally, as the income of people in those countries rises, Netflix will be able to increase the prices it charges for its service.

Meanwhile, as cord cutting in the U.S. greatly accelerates, freeing consumers from their huge cable bills and leaving them with more money to spend on streaming channels, Netflix (and its streaming competitors) will be able to meaningfully raise their prices in the U.S.

Slowing Spending Growth

I believe another consequence of cord cutting will be lower content costs. With the pockets of conventional TV channels no longer bursting with the tens of billions they indirectly receive from cable subscribers (many of whom rarely, if ever, actually watch their channels), the channels will have much less money to spend on their shows. Consequently, the cost of making shows should drop meaningfully. Meanwhile, as Netflix finishes acquiring infrastructure (office buildings, studios, etc.) abroad and no longer has to spend so much time on hiring employees overseas, its costs in those markets should fall.

These trends may already be starting to take hold. In his Q4 letter to shareholders, Netflix CEO Reed Hastings wrote, “our plan is to continually improve (free cash flow) each year and to move slowly toward (free cash flow) positive.” Lower costs are probably one reason the company’s free cash flow is climbing.

Streaming Consolidation

In the long-term, Netflix stock is likely to benefit from the consolidation of the streaming sector. While fragmentation was fine for the industry when every TV channel received revenue from every cable subscriber, it won’t work nearly as well in the internet video era.

It’s highly likely, for example, that Hulu will not be the last internet video content provider swallowed up by Disney. After all, why should Disney (which of course has a tremendous amount of cash) struggle to compete with the Hulus of the world when it can just buy them?

Comcast (NASDAQ:CMCSA), the owner of NBC, is in a similar situation as Disney. And I believe that Apple, AT&T (NYSE:T) and Amazon (NASDAQ:AMZN) will sell their internet TV businesses, since none of them has a great deal of experience making TV shows, and TV is not their primary business. Meanwhile, ViacomCBS (NASDAQ:VIAC) is likely to be acquired. I think, within three or four years, we’ll go from the six or seven major streaming players that will be in place by the end of 2020 to three: NBC, Disney and Netflix. Of course, that consolidation should reduce Netflix’s competition and enable it to raise its prices, since it won’t have to worry about being undersold by the likes of Amazon, Apple and ViacomCBS.

The Bottom Line on NFLX Stock

Netflix’s growth is clearly not being stymied by its competition. In the quarters and years to come, its results will be meaningfully boosted by continued user growth at home and overseas,  positive overseas macro trends, price hikes in the U.S. and consolidation. Consequently, NFLX stock is worth buying.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer.

Article printed from InvestorPlace Media, https://investorplace.com/2020/02/netflix-nflx-stock-plenty-more-room-to-run/.

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