In line with my previous prediction, Netflix (NASDAQ:NFLX) reported strong first-quarter results on April 21. As I’ve noted previously, the company will probably benefit from the recession and continued fears about the coronavirus. As a result, I remain very bullish on NFLX stock.
The company’s Q1 revenue came in slightly above analysts’ average estimate, and it reported earnings per shares of $1.57, versus the mean outlook of $1.64. However, I’m sure that many bears expected much weaker results. The company added nearly 16 million net new subscribers, versus the average outlook of 8.5 million. Netflix added 9.6 million net new subscribers during the same period a year earlier.
The Recession Will Help Netflix
In my previous column, I pointed out that cord-cutting will probably accelerate during the recession as those who have lost their jobs look to save money. Of course, many of those who cut the cord will join Netflix, boosting the company’s results and NFLX stock.
During Netflix’s Q1 earnings conference call, CFO Spencer Neumann, pointed out another reason why Netflix’s results could be boosted by a recession. Specifically, he said, “Obviously, past recessions, folks tend to spend more time at home and with home entertainment.”
Indeed, it makes sense that unemployed people are much less likely to go on vacations, weekend trips, and out to eat than consumers with jobs. Consequently, the vast majority of those who are unemployed will probably keep or add Netflix.
Additionally, due to the positive catalysts that Netflix will receive from the recession and continued fears about the coronavirus, the company may be able to get away with spending 10%-20% less on developing new shows and buying old ones.
In other words, if consumers are adding Netflix because of sot, then the company won’t have to outdo cable channels on content by too much to attract millions of net new subscribers. Given the combination of accelerated subscriber growth and reduced spending on content, Netflix’s free cash flow picture could greatly improve. That would certainly be positive for Netflix and NFLX stock.
Bears might argue that some consumers who have Netflix and cable might choose to dump Netflix and keep cable. And in another scenario that would be bearish for Netflix, some consumers could decide to dump its service and add Hulu or Disney’s (NYSE:DIS) Disney+, both of which are slightly cheaper than Netflix, instead.
While some consumers will take such actions, I think the vast majority of Netflix’s customer base will not abandon the service.
First of all, Netflix is so much cheaper than cable. As a result, it would make much more sense for cash-strapped consumers to cut their cable bills than to eliminate Netflix. Secondly, Disney+’s content will not keep most adults entertained for weeks. Further, the ad-supported version of Hulu, at $6.48 per month, is so cheap that keeping Hulu and Netflix together will not meaningfully affect most Americans’ budgets.
And finally, Neumann pointed out that, in past recessions, pay TV companies haven’t lost many subscribers. (However, cable companies have never before endured a recession in which Netflix and Roku (NASDAQ:ROKU) were very popular.)
Netflix’s Guidance Is Probably Conservative
The company predicted that its growth would decelerate as the lockdowns ease. Specifically, it said it expects to add only 7.5 million new subscribers in Q2.
But given the economic factors I discussed above, along with the fact that many people will still be staying home in Q2 due to the coronavirus, I think that outlook will prove to be very conservative.
The Bottom Line on NFLX Stock
Given the boost that Netflix will get from the recession and from many people staying at home, along with the company’s conservative Q2 subscriber guidance, I recommend that investors buy NFLX stock at this point.
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. As of this writing, he owned Roku stock.
