Netflix (NFLX +1.13%) and Peloton (NASDAQ: PTON) have seen their shares beaten down in 2021. While Netflix is up just 1%, Peloton stock is down about 17%. Investors are concerned that the companies will become victims of a loss of consumer interest as economies reopen. Both were big winners during the pandemic.
Still, worries may be overblown as Netflix and Peloton were thriving even before the pandemic. Sure, lockdowns provided a boost, but that doesn't mean reopening makes them a poor investment. The negative sentiment could be an opportunity for long-term investors.
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A powerful flywheel
Netflix is approaching an inflection point. The company has attracted enough subscribers and raised prices enough to be cash flow positive from here on out. Here is what management said on the matter in a shareholder letter: "As we discussed last quarter, we believe we are very close to being sustainably FCF [Free Cash Flow] positive and that we no longer have a need to raise external financing to fund our day-to-day operations."
As of March 31, Netflix had 208 million subscribers, which allowed it to generate nearly $7.2 billion in revenue in the first quarter. Even with no member additions or price increases, that would be an annual run rate of around $28.6 billion. The steady flowing stream of revenue gives Netflix the power to build a massive content library that will attract and retain subscribers. Indeed, Netflix plans to spend $17 billion on content in 2021.
Netflix's scale efficiencies show up in its operating profit margin, which increased from 4.3% in 2016 to 18.3% in 2020. It costs Netflix roughly the same if 10 million people or 20 million people are streaming content on the platform.
While the pandemic accelerated demand for streaming entertainment content, the shift from linear TV to streaming is a long-lasting tailwind at Netflix's back.
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Convenience in exercise
At the onset of the coronavirus pandemic, the lockdowns fueled sales of Peloton's popular exercise products, to be sure. However, sales were already growing over 100% per year for six years.
The company's products and services are immensely popular with consumers, and Peloton has received a net promoter score, which measures customer loyalty, satisfaction, and enthusiasm, of 94. Peloton has built up 2 million connected fitness subscribers, who pay a monthly fee to access workout content. Still, 52 million folks have expressed interest in learning more about a Peloton product or service, highlighting the broad addressable market in front of Peloton.
Indeed, customer demand for Peloton products was so high at one point during the pandemic that folks had to wait upwards of 10 weeks to receive an order. Management can be commended for quickly addressing the long wait time and bringing it back to pre-pandemic levels. Additionally, Peloton has made investments in increasing capacity to meet surging demand. That has given management confidence to expand to a new international market. The company announced the availability of Peloton in Australia starting in March.
Underlying Peloton's rapid growth is the convenience of home workouts over gyms. With a home workout, you don't have to drive to the gym, look for and pay for parking, or discover your desired equipment is already in use. Here in Los Angeles, before the pandemic, several times a month, it would take 45 minutes for the combination of getting to my gym and finding a parking spot. And my gym is only four miles away from home.
According to Statista, there are 174 million members of fitness clubs worldwide. That's a large target audience of people that Peloton can serve with its products and services.
Netflix and Peloton are loved by millions of consumers that use their products and services. That should allow them to continue serving an expanding customer base for years and perhaps decades. Investors should certainly consider adding these two growth stocks to their lists.
