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Should I Buy Netflix Stock?

By Daniel B. Kline – May 12, 2020 at 11:54AM

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The streaming giant has gained a ton of members during the coronavirus pandemic but warned against expectations of more of the same.

Stay-at-home efforts necessitated by the coronavirus pandemic has made streaming services indispensable to people looking for ways to pass long periods of time stuck at home. That was very good news for Netflix (NFLX -2.24%) when it reported first-quarter earnings in April.

Being stuck at home left people looking for something to do, and many chose to join the streaming leader. The company added roughly 16 million subscribers globally, going from 167.09 million at the end of Q4 to 182.86 million to close Q1.

That's astounding growth, but the company expects it to slow as stay-at-home orders are lifted. CEO Reed Hastings offered some color on that in his first-quarter letter to shareholders:

At Netflix, we're acutely aware that we are fortunate to have a service that is even more meaningful to people confined at home, and which we can operate remotely with minimal disruption in the short to medium term. Like other home entertainment services, we're seeing temporarily higher viewing and increased membership growth. In our case, this is offset by a sharply stronger U.S. dollar, depressing our international revenue, resulting in revenue-as-forecast. ​We expect viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon.

Basically, Hastings is telling investors not to expect Netflix to keep adding 16 million new subscribers each quarter. That's fair, but Netflix still expects to add another 7.5 million paying customers in Q2.

Netflix headquarters

Netflix has been able to keep some operations going during the pandemic. Image source: Netflix.

What the market looks like for Netflix

Very few companies have maintained business as usual during the current global crisis. Netflix has had to suspend production of new programming, but it had a number of shows already completed and a huge archive of content to entertain existing customers and attract new ones. It has also been able to operate its animation unit remotely and has been able to continue post-production on shows that have already been shot.

Hastings has made it clear that projecting member growth in the near term is guessing.

"Hopefully, progress against the virus will allow governments to lift the home confinement soon," he wrote. "As that happens, we expect viewing and growth to decline."

Basically, if people are still stuck mostly at home, numbers could grow. If they're allowed to get at least somewhat back to normal, people may spend more time away from their televisions, which could slow down growth.

"Some of the lockdown growth 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," Hastings wrote. "Intuitively, the person who didn't join Netflix during the entire confinement is not likely to join soon after the confinement."

At some point, growth will slow. That does not mean that Netflix isn't a stock you should buy and hold for the long term.

Should you buy Netflix?

Netflix has stable recurring revenue. It has become a sort of default for consumers, and it's hard to picture subscriber counts falling. What will fall, in the long term, is the company's content expense.

As it has added countries, the streaming giant has had to create local content and spend money translating existing shows. It has also had to throw a lot of shows at the wall to see what works.

The company should eventually be able to get better at producing a higher percentage of shows that resonate with viewers and keep them engaged. That will eventually allow it to cut costs while not losing membership revenue.

Netflix has been trading near its 52-week highs. It's likely to move past those numbers, but it may take years for the company to show the same level of stock price growth as it did over the past decade. The next few quarters may not be typical, but over the next few years, the arrow on this stock is still pointed decidedly up.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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