The novel coronavirus has been bad news for many stocks, but there are some exceptions. Take Netflix (NASDAQ:NFLX) stock for example. Not only have shares held steady as markets remain below their all-time highs, but the streaming powerhouse now trades well above where it was before the pandemic broke out.
It’s obvious why the company has fared so well these past few months. With millions still stuck at home due to “social distancing,” people are bored, with few entertainment options. So, how are they preventing cabin fever? By binge-watching streaming services like Netflix.
But isn’t this a short-term trend? Once we “return to normal,” wont many who signed up for the service due to “shelter-in-place” orders simply cancel their services? Especially if we experience a prolonged economic downturn?
I don’t think so. A slowing economy may affect consumer spending. But given their relatively low subscription cost, Netflix is more recession resistant than you think. Add in their business model’s inherent “stickiness,” and it’s clear this is a great hedge against a recession.
Also, NFLX stock is on the winning side of a major megatrend: the rise of streaming video. Put it all together, and shares are a screaming buy. Even as the stock trades near all-time highs.
Today’s Tailwind Is Just The Start for NFLX Stock
The company’s Q1 earnings may have disappointed Wall Street. But that doesn’t mean the party’s over. Far from it. If anything, the growth runway for Netflix stock looks stronger now than it did a year ago.
Let’s rewind back to 2019, when domestic subscriber growth was slowing down. U.S. subscriber growth was just a few hundred thousand, compared to the millions worldwide signing up. In other words, it looked as if Netflix peaked in the United States.
But now? The coronavirus and “shelter-in-place” have created a captive audience. Millions who never had or canceled their Netflix subscriptions are signing up in droves. In 2019, it may have looked as if Netflix would top out at 60 million U.S. subscribers. But now? Nearly 70 million now subscribe to the service.
Is this just a short-term bump due to the fact streaming is one of the few forms of entertainment right now? Or is this just the start of continued growth? I’m banking on the latter.
Things are just getting started for NFLX stock. The coronavirus tailwind just fuels what was already a megatrend in motion.
What do I mean? Firstly, the coronavirus means people are going to change their habits. Think less going out to movies and sporting events, and more streaming at home. Secondly, Netflix’s business model is “sticky.” In other words, very little customer attrition.
With a subscription-based business model, the company has a more consistent revenue stream. Other streaming platforms use advertising as a major profit center. But advertising revenue ebbs-and-flows with the business cycle. Even today, with millions more streaming than normal, advertising is in a slump. More viewers does not always equal more ad dollars coming in the door.
What About Competition?
Netflix bears see competition as a reason why shares could be overvalued. Disney+ (NYSE:DIS) has already signed up more than 50 million users. AT&T’s (NYSE:T) HBO Max and Comcast’s (NASDAQ:CMCSA) Peacock services are just around the corner.
With the legacy media companies building their own streaming platforms, not only does the company gain formidable competitors. They also lose access to popular re-runs that have been the bulk of its content consumption.
Yet, I think investors are living in the past, and not keeping their eyes on the future. Content depreciates over time. Ten years from now, people are going to be watching reruns of shows airing today, not reruns of shows that aired in the 1990s and 2000s.
Netflix knows this, and is quickly building its content library. Instead of depending on licensing deals with Hollywood, the company has “gone Hollywood.” And they’re giving the old school media companies a run for their money.
But that’s not the only way Netflix is gaining an edge against the entertainment establishment. The company’s agressive overseas growth gives them a running lead as the rest try to catch up.
Things Are Far From Over for Netflix
With the rapid increase in subscribers due to the pandemic, it may seem as if Netflix is simply signing up users that would’ve signed up down the road. That may be true, but I don’t take that to mean things are peaking, and will eventually fall off.
Even in a severe downturn, households are more likely to “cut the cord” (cable) than get rid of relatively inexpensive Netflix. If anything, this company will thrive, not merely survive, in the coming years.
A great hedge against recession, and on the winning side of the streaming megatrend, consider NFLX stock a buy.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
