Here’s Why the Bears Are Wrong on NFLX Stock
For stock market investors, Netflix, Inc. (NASDAQ:NFLX) needs no introduction. Among companies on the S&P 500, shares of NFLX stock have been the best performer so far in 2015, with an astonishing 168.3% return. The revolutionary company is building a wide economic moat with its original content and is expanding its subscriber count at an incredible pace.
Can the good times continue? It’s possible.
NFLX Stock: Changing People’s Viewing Habits
When you talk about online streaming of premium content, Netflix is the undisputed king in the business. The company essentially pulled people away from cable television to its on-demand video streaming service. The appeal is simple: why spend more money on cable television when you can get more shows to watch any time you want on any device you want for less than 10 bucks?
Netflix was quite modest about successfully changing people’s viewing habits. In its latest earnings report, the company said, “The secular shift to on-demand consumption is best described as ‘consumers evolving vs. old habits’ rather than ‘Netflix vs. traditional media’.” (Source: “Final Q3 2015 Letter to Shareholders With Tables,” Netflix, Inc., last accessed December 4, 2015.) But in actuality, everyone knows that it’s Netflix that brought the service in the first place so that viewers can shift to on-demand content consumption.
The neat thing for Netflix is that unlike some companies in the Internet industry, becoming a user of Netflix does not require you to be tech-savvy. All you need to do is sit there and pick what you want to watch. Moreover, when all of your friends are talking about House of Cards, you might want to start watching that show, which is exclusively on Netflix, as well.
But what if people give their passwords to their friends? Wouldn’t that affect Netflix’s user growth? Turns out, you needn’t worry.
Netflix’s standard plan allows two devices to stream at the same time, while the premium plan allows four devices to stream concurrently. The concern is that if subscribers share their passwords with non-family members, it would put constraints on subscriber growth.
According to a survey of more than 5,000 Netflix users, 65% of survey respondents said they share their accounts with others. Moreover, 19% said that they share their accounts with three or more other people. (Source: “Wall Street Doesn’t Think Using Your Friend’s Netflix Account is a Problem,” Business Insider, last accessed December 4, 2015.)
Sounds like a serious problem right? Not really. You see, at the time of the survey, Netflix had 45.6 million subscribers in the U.S. Combining that with the results of the survey, there were actually 99.8 million Netflix viewers, which looked like a lot. But keep in mind that Netflix allows sharing among family members. Taking the average U.S. household size of 3.1 members and multiplying it by the number of subscribers, the company would have more than 141 million viewers.
The survey implication of 99.8 million viewers is way below the 141 million potentially allowed by Netflix. This finding confirms Netflix’s CEO Reed Hastings’ previous comment that password sharing is not a significant issue.
The Bottom Line on NFLX Stock
Another concern about Netflix is that the company is spending big money on original content. However, investors seem to like it, because investing in and creating exclusive content is key for Netflix to retain its lead in the business. Moreover, despite all the spending, the company’s bottom line has been improving both year-over-year and sequentially. And on that note, it’s fair to say that the NFLX stock price could continue to go higher.