Last week, Pfizer and BioNTech announced their COVID-19 vaccine candidate had a greater than 90% efficacy rate in trials, which climbed to 95% after the companies concluded the Phase 3 study. And this week, Moderna announced its vaccine candidate had a 94.5% efficacy rate in trials, and none of those who received the vaccine caught a severe case of COVID-19.
Obviously, this is unequivocally great news for the U.S. and the world. At the same time, some companies that have seen a tailwind from COVID-19 and the "work from home" environment saw their stock prices get crushed as a result of this positive vaccine news.
Netflix (NASDAQ:NFLX), which has benefited from such a tailwind, saw its shares tank 9% last Monday. But Netflix shareholders should have nothing to fear from a successful vaccine.
First, it's important to establish the tailwind Netflix has gotten from COVID-19 is real. In the first half of 2020, Netflix gained 25.9 million paid net subscribers globally. That's almost as much as the 28.6 million and 27.8 million paid net subscribers the company added during the entire 2018 and 2019 years, respectively. There is no doubt more households around world sought out Netflix due to the greater need for at-home entertainment during this pandemic.
While the company doesn't disclose specific engagement metrics, it's reasonable to assume subscriber engagement has been through the roof this year. A major clue is the company's recent announcement it is raising subscription prices in the U.S. The Basic plan will remain at $8.99 per month, while the Standard plan is increasing $1 to $13.99 per month and the Premium plan is increasing $2 to $17.99 per month.
Generally, management ties price increases to subscriber engagement levels since subscribers are more likely to accept price increases if they are heavy users of the service.
Vaccine fears overblown
Just because Netflix has benefited from a COVID-19 tailwind this year, doesn't mean the business is going to come under pressure when the virus is defeated. For that to be true, you'd have to think a big number of the subscribers who signed up for Netflix this year are going to cancel when things return to normal.
Certainly, some might cancel but it's unlikely to be material to the company's financial results. For one thing, people who try Netflix tend to love it. It has become such a staple in our culture because the company releases so much new and compelling content so frequently. Many of the most talked about shows are on Netflix, and many people naturally want to be part of the conversation around the proverbial water cooler. For that reason, Netflix is likely to retain the vast majority of its new "lockdown" subscribers.
Still a huge runway for growth
Many U.S.-based investors think of Netflix as more of a mature business because Netflix feels fairly saturated in the U.S. But that's a misunderstanding for two different reasons.
First, Netflix isn't that saturated in the U.S. The company's United States and Canada segment, known as UCAN, had 73 million paid subscribers at the end of September. For context, there were about 129 million households in the U.S. last year, according to the U.S. Census Bureau, and another 14 or 15 million in Canada. That's almost 145 million households, and that figure is projected to continue to grow over the long term. So while subscriber growth is likely to be unexciting in the UCAN segment, it still appears a long way from saturated.
Second, there's an enormous runway outside the U.S. that Netflix is just starting to penetrate. In total, there are about two billion global households today, and that is almost certain to increase over time. In the long run, it is a good bet that the majority of households will have household internet connections sufficient to stream Netflix. That represents a massive long-term global opportunity, considering Netflix "only" has 195 million paid subscribers today.
While Netflix doesn't currently operate in China, you never know what might happen over the long term if enough Chinese consumers demand access to Netflix's content. The company has invested resources trying to get into China in the past, and certainly hasn't closed the door on the opportunity.
Rather than fret over Netflix's COVID-19 tailwinds coming to an end, which had already been more or less expected next year, investors should focus on the company's huge opportunity over the next couple decades.