Up more than 47% year-to-date, Netflix (NASDAQ:NFLX) is easily one of the best-performing mega-caps out there, confirming the status of NFLX stock as a prime beneficiary of the stay-at-home trend forced upon Americans by the novel coronavirus pandemic.
Like the broader market, Netflix slumped in March when “shelter-in-place” became part of the everyday vernacular in the U.S., but that was a boon, not a drag for Netflix investors. Consumers and entertainment seekers quickly got acquainted with what policymakers consider essential and non-essential.
Supporting the case for streaming entertainment equities was the removal of movie theaters and live sports from the traditional entertainment lexicon.
Those are two credible reasons why Netflix and video game equities are among this year’s best-performing assets.
Indeed, NFLX stock is tethered to coronavirus. The shares are up 13% for the month ending July 2, a period including a spike in new cases in major population centers, including California, Florida and Texas.
More proof that Netflix gets a lift from stay-at-home policies: the company reported 15.8 million subscriber additions in the first quarter against an estimate of seven million. The company no longer makes those forecasts, but whisper numbers suggest 10 million new subscribers for April through June period against Wall Street’s estimate of seven million.
But Wait, There’s More
These days, it can feel like it’s difficult to consider Netflix as more than a Covid-19 play. Obviously, a company that’s a next-generation equivalent of a movie/television studio benefits from people staying at home or consuming entertainment on mobile devices. However, Netflix doesn’t need pandemics to be a strong option for investors.
Confirming that, Netflix surged about 60% from October 2019 through February – a five-month stretch that included little domestic Covid-19 impact.
That’s just one timeframe, but it is indicative of Netflix having catalysts to drive upside for investors without a global pandemic to lean on. Indeed, the company has some arrows for stock price appreciation in its quiver. For example, the recent “Must Keep TV” survey by Solutions Research Group Consultants had Netflix in the top spot among networks, jumping from the second spot in 2019 to best rival Disney (NYSE:DIS).
Second, Netflix is cheap. Not the stock, but the service. Netflix subscription plans range from $9 to $16 per month, hence why the company has long been seen as problematic for traditional cable providers.
Netflix pricing is one reason why the recent price hike by Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube TV to $64.99 per month from $50 could prove to be gaffe by the latter and a boon for the former.
Now, YouTube TV looks a lot more like an old school cable bill while Netflix still looks like the nimble upstart it was years ago. Additionally, at a time of high unemployment and with consumers looking to cut back on discretionary expenses, raising prices on stay-at-home entertainment isn’t a shrewd move. Advantage: Netflix.
Bottom Line
Netflix is pricey at 75.76x forward earnings, bleeds cash and its path to generating free cash flow became more turbulent as a result of the coronavirus. It could be after 2021 before the company turns cash flow positive.
Those factors shouldn’t be overlooked, but there are more reasons to embrace NFLX stock than there are to bet against it. This is a well-run company with a content pipeline that was stocked before Covid-19, enabling it to deliver fresh content to all those viewers sheltering in place, something traditional networks couldn’t do because of social distancing and the shutdown.
Additionally, growth is robust in international markets and potentially strong enough to take Netflix to 300 million subscribers by 2024, up from 200 million today. Assuming that mark is hit and cash flow positive arrives sooner-than-expected, Netflix is worth paying up for today.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
