Netflix (NASDAQ: NFLX) is experiencing a surge in demand as the novel coronavirus pandemic continues and people around the world stay home more often.
The outbreak is causing more changes at Netflix than just a surge in demand. Indeed, it helped accelerate member acquisition in the first quarter, when it added 15.8 million new subscribers. But Netflix also had to contend with a significant portion of its 182 million users streaming content simultaneously. The company's reliability during a time of extreme usage certainly increased an already high level of customer loyalty. Let's take a look at three reasons why now is the time to buy Netflix stock.
Netflix is almost essential during a pandemic
First, Netflix has over 182 million paying members worldwide, and the resurgence of COVID-19 in some states and countries makes it more likely that it will continue adding millions more. Second, the company has the potential for price increases on its massive base of viewers. Third, because of the outbreak, there is an industrywide slowdown in content creation.
The company is slated to report its second-quarter results on Thursday. Management expects to have added 7.5 million subscribers when it announces its results. It will not be surprising if it reaches 200 million paying customers by the end of 2020. And even beyond the impacts of COVID-19, the long-running trend of consumers shifting from linear television to streaming is an undercurrent helping Netflix reach higher subscriber numbers.
Average revenue per month and per user is $10.87. Admittedly, the competitive environment with additional streaming providers entering the fray might limit its pricing power to some degree. Further, given the current recessionary climate, management does not feel like now is the appropriate time for increases. However, the growing demand for in-home entertainment, the company's status as the best-in-class streaming service, and the overarching shift to streaming from linear should allow it to exercise additional price hikes in the long run.
The pandemic led Netflix to pause many new productions for 2020. The benefits of reducing the spending on content will be over $1 billion this year alone. Netflix was initially expecting to generate a negative $2.5 billion in cash flow for 2020 and now plans to lose around $1 billion for the year. Moreover, because of the current circumstances, many of its competitors are also not working on content. In the short term, the industrywide slowdown in content creation is excellent for improving free cash flow.
What this means for investors
The coronavirus pandemic is wreaking havoc around the world, and it appears as though people will be staying home for longer than expected. Enter Netflix, with its many binge-worthy programs and reliable service, to entertain society in this most challenging time.
Admittedly, some customers who signed up during the pandemic may cancel when there is a return to normalcy. However, given Netflix's high customer retention percentage, investors can feel confident that the company will maintain its viewership. Finally, even though its share price exploded during the pandemic, it is still trading at a price-to-sales ratio under 11, which is below its mid-2018 peak of 12.7.
Given its relatively fair valuation and excellent prospects, investors should look to accumulate shares of Netflix stock. Still, volatility might remain high for the rest of the year; therefore, it would be practical to add to your position gradually over time.
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