The Upside for NFLX Stock
An underrated feature of Netflix, Inc. (NASDAQ:NFLX) is its resilience against an economic downturn. You see, NFLX stock isn’t built on the goodwill of one or two clients; it is built on regular payments from 81 million subscribers.
It has its eggs in many baskets, a strategy that comes in hand when the economy hits a rough patch. Recessions are the worst. People stop spending as much in case they lose their jobs.
That may seem to make sense from the consumer’s point of view, but it only weakens the economy further, putting more jobs at risk.
Netflix has a business model that keeps it relatively safe during those times. The company’s subscriber model is diversified enough to allow for some losses.
Think of each subscriber as a little stream. There are 81 million of these little streams and by flowing together they form a raging river. Even if 1,000 of those streams dry up, would it really make a difference? I don’t think so. (Source: “Netflix Releases First Quarter Results 2016,” Netflix, Inc. web site, April 18, 2016.)
Let me explain…
Picture a guy named Tim Parsons. Tim works for a small accounting firm in Midland, Texas. His company got lucky during the oil and gas boom, scoring three big clients in the shale sector.
Every night, Tim leaves work, goes home, and has a beer while watching Netflix. His monthly subscription is one of Netflix’s “little streams” of revenue.
Life is going pretty well for Tim…but then oil prices crash. His accounting firm has only three big clients and now those firms are in serious trouble. Two of the oil companies go out of business. As a result, Tim’s accounting firm starts laying people off.
This puts Tim in a really tough spot. He could lose his job any day, which means he needs to save more. Tim might switch his beer from imported to domestic, eat out less often, and maybe even cancel his Netflix subscription.
But losing Tim’s business wouldn’t hurt Netflix. Even if another one of Tim’s colleagues also cancelled their subscription, it would be just two small streams in Netflix’s ocean of revenue.
By contrast, Tim’s accounting firm got into serious trouble when it lost just two clients. It’s because those clients represented a huge portion of the firm’s revenue. Netflix doesn’t have to face that risk, which is why I love NFLX stock.
I know last quarter’s earnings spooked a lot of investors, but rest assured, the company can easily recover. It’s raising prices on long-standing customers by one or two dollars this year. I think most people will gladly pay.
In fact, that’s another benefit of the subscriber model. Tiny increases can add up to huge gains when there are so many revenue streams. On the whole, extra income should help pacify nervous shareholders, while also displaying Netflix’s winning strategy.