Netflix (NFLX 0.04%) shares have climbed a tremendous amount over the years. That makes it easier for investors to ignore any downside scenarios that could interrupt what has been a jaw-dropping ascent. The smartest investors, however, are always thinking about what could go wrong.
How might this streaming stock perform in a mild recession, and in a severe one? Let's see.
Image source: The Motley Fool.
Consumer spending has a big impact on the economy
Any seasoned investor knows that recessions are a normal part of the economic cycle. Economies are made up of individual and corporate decisions. And when things get to extreme levels -- indicated by excessive debt, unsustainable growth, and investor exuberance -- the system can quickly reset.
The result is a recession. This is defined technically as two straight quarters of negative GDP growth, so people don't generally know that that they're in one until after the fact. The last time the U.S. economy experienced declining gross domestic product (GDP) was during the onset of the COVID-19 pandemic. Due to the widespread disruption caused by this black-swan event, the National Bureau of Economic Research labeled the period a recession, even though it lasted much less than two quarters.
Before this was the Great Recession, which stemmed from the subprime mortgage crisis, and lasted from 2007 to 2009.
Because consumer spending represents almost 70% of the U.S. economy, and consumer confidence is at an all-time low, some of the investment community is starting to fear that a recession is imminent. Throw in worries about ongoing geopolitical tension and the impact artificial intelligence (AI) might have on the labor force, and it's easy to be fearful.
These concerns alone can become a self-fulfilling prophecy. They could push households to cut back spending, which in turn could result in a recession.
A mild recession could be a boon for the streaming pioneer
Let's imagine that over the next six to 12 months, the U.S. sees a small uptick in unemployment and a slight reduction in consumer spending and corporate investment. This would be considered a mild recession. From a fundamentals perspective, I believe Netflix will hold up well, and might even flourish, in this situation. The stock price might drop with the overall market, though.
In order to save money, consumers might decide to go out less, which can negatively affect restaurant and travel stocks, among others. But as people spend more time at home, they often watch more streaming content to entertain themselves. Here's where Netflix can win new customers.
The early-pandemic recession, which could be considered either mild because it was so short or severe since it happened so quickly, was a unique situation -- people were encouraged to stay at home. This created the perfect environment for Netflix to thrive, since it was a top home-entertainment choice. The business posted revenue growth of 27% in the first half of 2020, with net new subscriber additions of 26 million during those six months.
NASDAQ: NFLX
Key Data Points
The business could struggle in a drastic economic downturn
A severe recession would include surging unemployment, sizable declines in consumer spending and business investment, and maybe even bankruptcies. The Federal Reserve would have to step in and inject liquidity into the system to keep the economy going.
In this adverse scenario, I'd expect Netflix to struggle. And the share price, along with the rest of the stock market, would surely fall dramatically.
The streaming platform would be viewed less as a need-to-have subscription and more as a consumer discretionary offering. It doesn't help that 62% of streaming customers believe there are too many viewing options, according to research from The Motley Fool. There are also numerous free (ad-supported) streaming services that could fill the gap.
To be fair, though, Netflix would be able to handle it financially if memberships and revenue fell over any single quarter or year. The company is very profitable, posting a 24% net profit margin in 2025. And its interest coverage ratio, measured as operating income relative to interest expense, was nearly 17 last year. That's an extremely impressive cushion to have.
If Netflix really needed to conserve cash, management could pause share repurchases. Plus (probably as a last resort), it could tap capital markets for liquidity.
