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Netflix Stock Still Has Upside Despite Hitting Record Highs

Netflix added a record 15.77 million new subscribers in Q1 and its stock has been at record highs

Streaming video services have been in the headlines a lot in 2020. Disney’s (NYSE:DIS) Disney+ saw phenomenal growth as it launched in Europe just as the novel coronavirus pandemic hit. Comcast’s (NASDAQ:CMCSA) NBC Peacock is set to go live in two weeks. And video streaming pioneer Netflix (NASDAQ:NFLX) has been signing up new subscribers at a record pace. The question for potential NFLX stock investors is whether Netflix is seeing a temporary spike.

NFLX Stock Still Has Upside Despite Hitting Record Highs
Source: vesperstock / Shutterstock.com

Will subscribers fall after the pandemic wanes? Will they lose customers to churn as competing services ramp up?

NFLX stock gets an A-rating in my Portfolio Grader. And I believe the company is in a strong position that will continue to drive long-term growth.

Strong Q1 Subscriber Growth, Record High Stock Price 

Netflix reported first-quarter earnings in April. While its earnings per share were a miss, its revenue beat expectations and its operating income of $958.26 million was a 108.7% jump year over year. The big story was subscription growth. While the company noted sign-ups had “temporarily accelerated due to home confinement,” the numbers were still impressive: 15.77 million. That’s nearly 16 million new subscribers in a single quarter, more than double the 7 million it had expected.

Global subscribers hit 182.9 million, up nearly 23% year over year. 

NFLX stock has responded to the big numbers. Trading under $300 at the worst of the March market selloff, it eventually closed at an all-time record high of $468.04 on June 22. It has slipped slightly since then, but Netflix has still posted an impressive gain of 36.5% so far in 2020.

And I think it still has room for continued growth.

As Good As It Gets, Or Still Underpriced?

The boom of new subscribers during the coronavirus lockdown has left analysts divided about where the stock goes from here.

There’s a group that feels the pandemic conditions are “as good as it gets” for Netflix. Needham’s Needham’s Laura Martin is part of the group: “With streaming industry volumes up 50% year-over-year, plus zero competition from live sports, cinemas, restaurants, etc, is there any better macro environment for Netflix?”

This group makes the assumption that the first-quarter subscriber jump came at the expense of future growth. Not only that, but once the pandemic’s effects subside, Netflix will likely lose many of those subscribers. Free from the lockdown, they’ll turn off the TV and cancel their subscription.

While I agree that the second half of 2020 may well see some of those new subscribers ditch the service, I don’t think there’s a flood of cancellations coming. In fact, if we’re talking about the coronavirus, there’s a good chance of a second wave hitting in the fall and winter. Even if the race to find a vaccine is successful. At that time of year, there are even fewer opportunities to get out of the house than there were in the spring. If anything, that’s going to to lead to a second wave of new Netflix subscriptions. 

What if the current recession worsens? Will subscribers cancel? I doubt it. In fact, Netflix may gain from that scenario. There are few family entertainment options as cheap as a monthly Netflix subscription — the $8.99 basic service costs less than a single movie ticket.

Overall, the experts support my feeling that NFLX stock still has room for meaningful growth. The 42 analysts polled by CNN Business currently have NFLX as a consensus buy with a median 12-month price target of $500. That’s not massive upside, but near 12%, it’s a healthy gain.

Bottom Line on NFLX Stock

There is absolutely no doubt that Netflix has benefited from the coronavirus pandemic. Not in a predatory fashion — the company just happened to be in the perfect business for the times. People locked up in their homes with severely limited entertainment options? No wonder Netflix more than doubled its projected new sign-ups for the first quarter.

As for the threat of losing subscribers to the relentless launch of new competing streaming services? I think the concept of subscription fatigue is overplayed. As Forbes pointed out last year, the average American household was subscribing to 3.4 streaming services (and that was before Disney+ launched). At an average cost of $8.53 per month for each service, a $29 monthly streaming bill was still a fraction of the average $107 monthly cable bill.

That same Forbes report showed that as of last spring, 30% of U.S. households still didn’t have a single video streaming subscription. That’s an opportunity for Netflix. And a big reason why NFLX stock still has room for long-term growth.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters. 


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