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Is Netflix a Good Investment as More States Issue Coronavirus Lockdowns?

Netflix’s (NFLX) video streaming business is expected to get bigger in the near term as renewed lockdown measures imposed by states likely result in a further surge in demand for its services. As such, we think it behooves investors to evaluate the opportunity again.

Netflix, Inc. (NFLX), the world’s largest streaming entertainment platform with over 195 million paid memberships in over 190 countries, continues to witness massive growth spurred by government-imposed lockdowns forcing people to quarantine indoors. A series of popular, original shows and movies helped the company boost subscribers during this period.

As more states enforce new restrictions on businesses and social gatherings for the next month to combat a rising number of COVID-19 cases, viewership on the streaming site is expected to surge owing to the rising stay-at-home trend.

NFLX’s heavy investment in local language content and increasing paid membership have contributed to a gain 54% in the stock year-to-date. This impressive performance combined with several other factors has helped NFLX earn a “Buy” rating in our proprietary rating system.

Here’s how our proprietary POWR Ratings system evaluates NFLX:

Trade Grade: B

NFLX is currently trading above its 50-day and 200-day moving averages of $501.06 and $456.57, respectively, indicating that the stock is in an uptrend. Also, the stock has gained slightly over the past month, reflecting some short-term bullishness.

NFLX’s revenue increased 4.7% sequentially to $6.44 billion in the third quarter ended September 2020. The increase in revenue was primarily attributable to the increase in streaming paid membership and ARPU. Operating income grew 34.2% year-over-year to $1.31 billion, while EPS rose 17.8% from the prior-year quarter to $1.80 over this period.

NFLX raised streaming prices in the US by $1 to $14 per month. This will result in an increase in revenue for the company and boost its free cash flow. In the first nine months of 2020, NFLX added 28.1 million paid memberships, which exceeds the 27.8 million added for all of 2019.

The company has recently partnered with Reliance Jio, India’s largest mobile operator, to launch a bundle of series with their mobile and fiber broadband plans. NFLX also plans to integrate with two of Jio’s set top boxes as a part of this partnership. This investment in global streaming content will help NFLX accelerate its business growth.

Buy & Hold Grade: B

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, NFLX is well positioned. The stock is currently trading just 10.3% below its 52-week high of $575.37.

The company’s net revenue grew at a CAGR of 29.8% over the past three years, while net income increased at a CAGR of 85.4% over this period. NFLX’s EPS increased at a CAGR of 83.6% over the past three years. This can be attributed to the substantial increase in its paid membership and the big investments made by the company in local originals to improve the streaming experience for its members.

Peer Grade: C

NFLX is currently ranked #19of 59 stocks in the Internet group. Other popular stocks in this industry are Alphabet Inc. (GOOG), Twitter, Inc. (TWTR) and, Inc. (AMZN)

While AMZN beat NFLX by gaining 71.1% year-to-date, GOOG and TWTR returned 36.7% and 48.9%, respectively, over this period.

Industry Rank: A

The Internet industry is ranked #21 out of the 123 industries. The companies in this industry are engaged in numerous online business opportunities including streaming services, content, auction exchanges, e-commerce sales, and advertising sales.

With daily life changing for many around the world due to the coronavirus pandemic, there has been a huge surge in internet users as nationwide lockdowns have forced people to stay indoors.

The quarantine-driven binge on online streaming services also rose substantially as people found themselves with more time in their hands at home under the new stay-at-home normal. Also, a second wave of the pandemic that may lead to renewed lockdowns can further boost the subscriber growth of the streaming video businesses in the upcoming months.

Overall POWR Rating: B (Buy)

NFLX is rated “Buy” due to its impressive past performance, short-and-long-term bullishness, solid price momentum and underlying industry strength, as determined by the four components of our overall POWR Rating.

Bottom Line

We believe NFLX is well positioned to soar in the upcoming months despite gaining 54% year-to-date. With coronavirus fears pushing consumers to practice social distancing, online streaming services could see a surge in demand in the near-term.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is impressive for NFLX. It has an average broker rating of 1.52, indicating favorable analyst sentiment. Out of 39 Wall Street analysts that rated the stock, 21 rated it a “Strong Buy.” The consensus EPS estimate of $1.38 for the current quarter ending December 2020 indicates a 6.1% improvement year-over-year. The consensus revenue estimate of $6.60 billion for the current quarter indicates a 20.6% increase from the same period last year.

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NFLX shares fell $1.03 (-0.20%) in after-hours trading Tuesday. Year-to-date, NFLX has gained 58.44%, versus a 16.66% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.


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