Please ensure Javascript is enabled for purposes of website accessibility

Should You Buy Netflix After Its Blowout First Quarter?

By Andrew Tseng - Apr 29, 2020 at 11:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Or is this as good as it gets?

Netflix (NFLX -1.85%) blew past expectations for its first-quarter paid net subscriber additions. That's a result of the current COVID-19 outbreak and the huge increase in the number of people who are mostly housebound and looking for at-home entertainment.

Blowout quarter

Netflix gained 15.8 million net new subscribers during the the first quarter, crushing management's prior guidance of 7 million. The company had 183 million global paid streaming memberships as of the end of March. Management's guidance calls for the addition of another 7.5 million in the second quarter, which would bring the total subscriber count to over 190 million.

The cast of Netflix's Stranger Things.

Image source: Netflix.

As good as it gets?

Many analysts think this demand surge is "as good as it gets" for Netflix. Stifel's Scott Devitt wrote, "While the timing of a potential return to normalcy remains unknown, we expect some form of trend reversal to materialize as lockdowns are lifted and a portion of recent demand proves to have been pulled forward."

Evercore ISI's Lee Horowitz wrote, "As good as [first-half] trends appear to be for the company in the midst of the coronavirus pandemic, a slightly more cautious tone was indicated for the back half of the year, as some COVID-related pull-forward begins to bleed off and as tougher content compares potentially weigh on [second-half] growth."

These thoughts are not out of left field. Netflix's management wrote in the first-quarter shareholder letter that some of the extraordinary subscriber gains "will turn out to be pull-forward from the multi-year organic growth trend, resulting in slower growth after the lockdown is lifted country-by-country," and that "the person who didn't join Netflix during the entire confinement is not likely to join soon after the confinement." That's partially why management expects the third and fourth quarters of this year to have lower net subscriber additions than the same quarters last year.

Naturally, those cautious comments from management gave many observers pause about the sustainability of the subscriber surge.

Still the first inning

While Netflix will probably show less impressive subscriber growth in the second half of the year than in the first, focusing on this is missing the forest for the trees. Subscriber growth in the third quarter and fourth quarter -- whatever they end up being -- matters far less than the growth in the next decade or two.

Netflix is still scratching the surface of its long-term opportunity. There are roughly 1.7 billion global households, excluding China, where Netflix doesn't operate. But the world's population and household formation continues to grow. In a couple of decades, there could be closer to 2.1 billion global households, assuming the population grows at a 0.9% annual rate and household sizes remain constant.

Given the growth of internet connectivity globally, it's likely that the vast majority of those households will have broadband or other high-speed internet access. If 85% of households are "connected" by then, there would be over 1.7 billion global connected households who would have the ability to stream Netflix if they so desire. That's over nine times the current 183 million strong subscriber base.

But will they want Netflix? Well, prior to the coronavirus-related production disruptions, Netflix was on track to spend over $15 billion of cash on content this year. Even if it remains flat at that level in future years (though it could continue to increase), Netflix would spend $300 billion on content over the next 20 years.

And management's strategy is to make content that appeals to everyone. On the first-quarter conference call, Chief Content Officer Ted Sarandos said the company's objective is to "make your favorite show." He elaborated on that point in this way:

For some people, that's high -- that's big pedigree drama. And for other people, that's home improvement shows. And we want to make your favorite version of that. So we've been pushing out into each of those verticals beyond the true crime space and the competition space. We've done cooking shows like with Nailed It! and Chef's Table, and we're now pushing into more of the kind of into the home improvement and real estate space, which is also quite popular with our members, and continue to push out that as well.

And he wasn't talking just about the U.S. Netflix wants to create everyone in the world's favorite show. Sarandos commented that "if your house is anything like mine, then it is not the same show for any two people, let alone the whole world."

As Netflix spends hundreds of billions of dollars on new content over the next two decades, the vast majority of it on original content that it has perpetual rights to, we are going to see the company increasingly fill in all the content gaps. It's likely to have a massive fire hose of compelling new content targeted at virtually every interest group around the world. That's why Netflix's CFO Spencer Neumann earlier this year said, "[W]hether it's pay-TV or broadband households, we don't see why we can't get into all of those households over time."

Considering that the production shutdown is unlikely to have a noticeable impact on new content releases onto the service, Netflix is in good shape. Investors should appreciate that the company's first-quarter growth rate may have been as good as it gets this year, but the company is still likely to be far bigger and more profitable in the years and decades to come.  

Andrew Tseng owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$241.15 (-1.85%) $-4.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.