In the wake of the novel coronavirus outbreak and the resulting recession, Netflix (NASDAQ: NFLX) should benefit from strong, positive catalysts. As a result, investors should buy NFLX stock at its current levels.
Netflix Can Capitalize Here
As I pointed out in a recent column on Roku (NASDAQ:ROKU), with the U.S. likely already in a recession, many Americans will be looking to save money. And an easy way to save money is by cutting the cord — i.e. no longer subscribing to cable and satellite services.
Most of the Americans who will decide to cut the cord to save money likely already subscribe to Netflix. But some of them, especially older consumers, will add the service for the first time, boosting its revenue and profits and lifting NFLX stock.
Further, as I also pointed out in the column on Roku, with Americans staying at home so much, they will have a great deal of time to explore and appreciate the many available streaming channels. As a result, many will conclude (as I have) that cable and satellite subscriptions are no longer necessary. Again, some of these consumers may be first-time Netflix subscribers.
Similar trends are likely to play out in many other countries in which Netflix is operating.
Higher Dependency and Cord Cutting Will Facilitate Price Hikes
In a recent note to clients, research firm Bernstein reported that Netflix had carried out “significant price increases in most markets throughout 2019.” The firm says that it will be hard for Netflix to raise prices this year, due to the likely recession. However, it believes that consumers’ enjoyment and utilization of Netflix will increase as a result of the coronavirus crisis. As a consequence, the firm thinks that Netflix may be able to more easily increase its prices in 2021.
I’m not sure I agree with the idea that Netflix will not be able to raise its prices this year because of the recession. In the U.S., for example, consumers can save $50-$75 per month by cutting the cord. In that context, a $1-$2 per month price increase by Netflix is not significant. Further, even during a recession, I don’t think many consumers will stop subscribing to Netflix if it charges $1-$2 more per month.
Economic Issues May Limit Netflix’s Gains in Developing Countries
In my previous column, I predicted that “many more people in (developing) economies will get internet access,” while “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.” I also stated that Netflix would be able to increase its fees in developing countries as those nations’ economies improve.
Given the likely worldwide recession due to the coronavirus crisis, developing countries probably won’t be able to increase internet access and lower internet usage costs to the extent that I had previously expected. Further, due to the weak global economy, Netflix likely won’t be able to increase its fees in developing nations as much as I had previously thought.
However, because most developing countries are located in very warm parts of the planet, I don’t expect those countries to be hurt as badly by coronavirus. As a result, I think that most developing nations’ economies will get back on track by mid-2021, and Netflix will start benefiting from the positive trends I described at that point.
The Bottom Line on NFLX Stock
Netflix will likely be helped by the probable acceleration of cord cutting in the wake of the recession and the coronavirus crisis. Meanwhile, it should be able to raise its prices in 2020 and 2021. Finally, although some of its growth drivers in developing nations will probably be blunted this year, they should accelerate greatly in 021 and 2022.
Given all of these points, I recommend that medium-term and long-term 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 did not own any shares of the aforementioned companies.
