Forget the Netflix Stock Bears
The best-performing stock of 2015, Netflix, Inc. (NASDAQ:NFLX) is beginning the New Year with a more than seven intraday decline. The plunge may have largely been the aftermath of the Chinese stock market crash on Monday. But in part, it’s because of Baird’s downgrade of NFLX stock, which, in my analysis, bears little merit.
Baird has cited three potential risks for the downgrade of Netflix stock: international execution, content costs, and rising competition. (Source: “Netflix shares slide 4.5% as Baird downgrades to neutral,” MarketWatch, January 4, 2015.)
For starters, it beats me why Baird sees Netflix’s international expansion as a threat. Netflix’s international execution has, so far, been beyond successful. In fact, over the years, the service’s international subscriber base has grown at a much faster rate than its domestic base. The streaming service had a great reception in the Australian and Japanese markets where it launched in the last half of 2015. Its expansion in European markets like Italy, Spain, and Portugal has also been met positively.
Beginning this year, the great news is that Netflix is about to launch in Russia with further plans to expand into the Asian markets of Singapore, Hong Kong, Taiwan, South Korea, and eventually India. The international expansion will only prove a boon to the company—if anything. (Source: “Netflix Nearing Russia Launch, The Hollywood Reporter,” Hollywood Reporter, January 4, 2016.)
Secondly, granted that the company is working on producing its own original content, it will inevitably have to face higher costs. But better content will translate into more subscription dollars. In the past, the company has increased its subscription fees by nominal amounts to help cover for the costs. I don’t see why Netflix can’t do it again, should it face cost constraints.
Netflix sells a product that, to a great extent, enjoys price inelasticity of demand, which basically means that when the company increases the prices for its products, demand doesn’t fall proportionally. For my readers who understand Economics 101, the concept shouldn’t be a tough one to grasp. As a friend once said, “I don’t mind paying an extra buck for a great $10.00 service.”
In other words, the majority of Netflix subscribers continued to stick with the service even when the company increased its subscription fee twice in the last two years. (Source: “Netflix Raises Price of Most Popular Plan by $1 per Month,” Bloomberg, October 28, 2015.)
To put it into perspective, say Netflix decides to raise the price of all its subscriptions another $1.00. With more than 69 million subscribers, the additional revenue will translate into $69.0 million monthly incremental revenue and more than $828 million in annual incremental revenue.
As for competition, Netflix doesn’t have too much to worry about. The good thing is that the on-demand TV streaming industry is growing fast and driving out traditional cable services. The lucrative growth opportunities have obviously attracted new entrants, like Alphabet Inc’s Netflix-like service, “YouTube Red,” but Netflix continues to enjoy leadership.
Look at it this way: previously, Netflix took the biggest slice off of a small pie. Now, its share may be smaller in relative terms but the pie is bigger. It will still take the biggest slice but, this time, out of a much bigger pie.
The Bottom Line on NFLX Stock
Netflix stock has maintained a lead as the top growth stock for the last two years in a row. But investors must understand that growth eventually tapers off in all high-growth industries. This year investors will likely find value, if not growth, in NFLX stock, as it continues its dominance in the online streaming industry, not only domestically, but also internationally.
Potential investors should definitely consider putting NFLX stock on their to-watch radar following the recent dip.