Please ensure Javascript is enabled for purposes of website accessibility

Why Content Is King for Netflix During a Pandemic

By Neil Patel – May 26, 2020 at 8:18PM

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

Why the company still has growth potential after COVID-19 bump.

As we've all been forced to stay indoors during the coronavirus pandemic, finding entertainment options has been a necessity. If you're like me, Netflix (NFLX -1.03%) is a go-to choice when there's time to kill. Whether I'm binge-watching the new season of Ozark or putting on The Office for the umpteenth time, I never have trouble finding something to watch. I'm not the only one who sees the utility in this service, as the company's stock performance shows. Netflix was the best performing stock of the 2010s, ending the 10-year period on December 31st, 2019 up 41-fold.

And since the start of 2020, Netflix is up 33%, showing its strength in a time of general market turmoil.

Family watching television together.

Image Source: Getty Images

Coronavirus relief

Netflix lists selflessness and integrity as two of its core values on its website. As a global leader in the streaming entertainment space, the company understands and accepts its responsibility to help TV and film industry workers who have been devastated by the pandemic. Netflix has committed to spend $150 million supporting the industry. Not only has this assisted hourly production workers who are waiting for government aid to kick in, but some funds have also gone to out-of-work crew members in other countries.

Additionally, the European Union has asked certain technology companies to find ways to use telecommunications networks more efficiently as a direct response to increased internet usage with everyone stuck at home. Netflix immediately responded, reducing its network traffic by 25% while still maintaining proper video resolutions. The company is willing and able to implement similar measures across other geographies.

The numbers look impressive

Many investors are looking at the current situation and attempting to find opportunities from things that will change for good once we get back to normal. A more impactful approach is to assess secular shifts that have not only already begun, but that will accelerate due to the pandemic. Digital trends fall into this category, particularly streaming services.

Netflix added 15.8 million paid subscribers globally in Q1 2020, exceeding the company's internal forecasts. This is compared to 9.6 million additions in the prior-year period. Subscriber growth in the U.S. and Canada in Q1 2020 alone was 79% of total subscriber growth in all of 2019. The pandemic has clearly been the primary factor for this huge gain, and the company expects lower growth in Q2 2020 as stay-at-home orders are slowly lifted across the globe.

Netflix's moat is strengthened by streaming content obligations of $19.2 billion as of March 31st, 2020. In order to continue bringing more subscribers onto its platform, the company must pay up for high-quality content. It's an unstoppable flywheel effect. Revenue from an increasing subscriber base leads to higher content spend, which leads to a better user experience, which then attracts more subscribers, and on and on. The user experience piece is absolutely paramount because it creates untapped pricing power. Valuable content that Netflix's powerful algorithm suggests to me introduces new shows, documentaries, and movies that I otherwise would have no idea existed.

Press play

Netflix is an outstanding business, and the current crisis only bolsters its position as an indispensable consumer service. The company is showing its confidence and standing out against competitors by asking inactive members if they'd like to cancel their subscription. A small amount of lost revenue for sure, but nonetheless an opportunity to reconnect with abandoned users and ensure that they haven't forgotten that they're paying. Although subscriber additions showed a nice bump due to COVID-19, I think there is still meaningful growth in the years ahead.

The streaming wars have just begun. Netflix is the obvious frontrunner, but Mr. Market already knows this. According to consensus forecasts, revenue is expected to grow 22% this year and 18% next year, and the forward PE ratio is 70. As long-term investors here at The Motley Fool, we know that a company's PE ratio doesn't mean anything by itself. A high PE ratio doesn't always imply an expensive stock, and a low PE ratio doesn't always imply a cheap stock. However, the recent success of Netflix and the intense focus on digital trends has led to extreme optimism surrounding the company. I would certainly wait for Mr. Market to present a more attractive opportunity before buying.

Neil Patel 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.

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.
$224.07 (-1.03%) $-2.34

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

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.