During the current COVID-19 lockdowns, Netflix (NASDAQ:NFLX) has been one of the ultimate pandemic beneficiaries, as global, stay-at-home restrictions have boosted the need for safe, indoor entertainment. During the past three months, the streaming-entertainment giant's stock has not only come out of its bearish spell, but it's also surged to new highs as millions of new subscribers have signed up for its service, even as existing customers watched more shows and movies.
Before yesterday's session, Netflix's shares had gained about 40% this year, making it the best-performing tech stock so far in 2020. During that period, the S&P 500 lost 11%. Yesterday the stock closed at $452.58, a tad below its all-time closing high of $454.29 hit last Friday.
The company’s Q1 earnings report last month validated this powerful rally when Netflix posted the strongest subscriber growth in its history, adding a record 15.8 million connections. The Los Gatos, CA-based company experienced an explosive jump in customers in March, as billions stuck at home indulged in binge-watching the company’s popular shows, such as “Tiger King” and “Love Is Blind.”
Despite this year's remarkable rally, some analysts see additional upside for the stock. Jefferies last week initiated coverage of Netflix with a buy rating and a $520 price target, on the expectation of continued double-digit subscriber growth.
Analyst Alex Giaimo said in a note to clients that Netflix's addressable market is vastly underappreciated.
"We estimate the addressable market will grow to over 850 million, driven by a combination of broadband households and 'mobile only' users," he said.
"Netflix has been at the forefront of multiple industry evolutions, allowing the company to sustain significant first-mover advantages (we believe the mobile-only offering could be the next leg)."
Competitors Under Financial Distress
Rather than focusing on this short-term reason to buy the stock, in our view, investors should reevaluate Netflix for its other positive catalysts. One is that it will take much longer for new entrants in the video-streaming market to meaningfully hurt Netflix's leading position should a serious and prolonged recession occur.
Key competitors Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) both launched their own streaming services, Disney+ and Apple TV+, in November. Going forward, AT&T's (NYSE:T) WarnerMedia division plans to launch HBO Max on May 27 and Comcast's (NASDAQ:CMCSA) NBCUniversal will introduce its Peacock service in the U.S. on July 15.
Disney is one of Netflix's key competitors currently in deep trouble, hurt by the global health crisis, which cost the House of Mouse as much as $1.4 billion in lost profit last quarter as every part of its business took a hit due to global lockdowns.
The company’s streaming business, Disney+, is the only bright spot for the world’s largest entertainment company. A continued slowdown in its theme parks and other businesses could hurt Disney's ability to allocate cash for its streaming business.
One potential risk for Netflix, cited by its management, is the post-pandemic slowdown in subscriptions, potentially from customers letting their connections expire once they are out of quarantine.
“Like other home-entertainment services, we’re seeing temporarily higher viewing and increased membership growth,” the company said in a letter to investors. “We expect viewing to decline and membership growth to decelerate as home confinement ends.”
Netflix forecasts 7.5 million new subscribers in the second quarter—still powerful growth under normal circumstances, but much lower than the last quarter.
Bottom Line
Looking beyond the current health crisis, there are solid reasons to believe that Netflix has more growth potential. The company’s massive content investment, global distribution ecosystem, along with its growing scale and technological advantage are among the factors which will continue to support a bullish case for the stock.