The first half of 2020 is over and it has been a volatile one for equity investors, to say the least. The COVID-19 pandemic has weighed heavily on consumer spending that has affected several sectors. However, there were also a few verticals that have been immune to the impact of the dreaded virus.
Netflix (NASDAQ: NFLX) is one company that has in fact thrived to a large extent from COVID-19, as people are staying home and entertainment options are limited. In the first quarter of 2020, Netflix subscribers rose by a record 15.8 million to 182.86 million. This increased company sales by 27.6% year-over-year to $5.76 billion in Q1.
The company’s actual subscriber growth in the March quarter was 100% higher than its forecast. But, can Netflix continue to benefit from COVID-19 related tailwinds? What can investors expect from its Q2 earnings?
Subscriber growth for Q2
The earnings season is upon us and Netflix is slated to announce its second-quarter results on July 16, 2020. During its Q1 earnings call, Netflix forecast revenue growth for Q2 at 23% year-over-year at $6.05 billion. Comparatively, analysts tracking Netflix have an average revenue estimate of $6.07 billion.
The streaming giant estimated subscriber growth at 25.6% year-over-year, which means it will end the June quarter with 190.36 million subscribers, up from 151.56 million in the prior-year quarter and 7.2 million higher than Q1.
Netflix’s management has confirmed that these growth rates are not sustainable and it will normalize once people return to work and schools and colleges reopen. However, the recent surge in subscribers has driven Netflix stock to record highs. Netflix stock is trading at $477 and has gained 47.4% in 2020, compared to the S&P 500 decline of 3%.
What’s going right for Netflix?
Netflix stock has generated massive wealth for investors in the last decade. It has gained a staggering 3,000% in the last 10 years and has enough growth drivers to keep outperforming broader markets in the next few years.
The shift to online streaming has accelerated recently, which will continue to benefit Netflix. While it has penetrated 50% of the households in the U.S., several international markets remain untapped. According to one Piper Sandler analyst, Netflix’s international penetration stands at a mere 7%.
The cord-cutting phenomenon is yet to gain pace in high-growth developing markets and Netflix’s focus on creating original content to cater to a country’s domestic populace holds it in good stead.
Rising competition is a concern
While Netflix is among the top digital content platforms, the streaming space is becoming increasingly crowded. Heavyweights such as Disney (NYSE: DIS) and Apple (NASDAQ: AAPL) have recently entered the streaming segment. Other major players such as NBC’s Peacock and HBO Max will also impact Netflix sales as they launch their online services in 2020.
Will Netflix be able to sustain its leadership position in the upcoming decade? Will global households have the purchasing power to subscribe to multiple streaming platforms? These are some of the questions that need to be answered.
Netflix has further outlined certain risks due to the COVID-19 pandemic. including a halt in original content production due to lockdowns and an appreciation in the U.S. dollar that will drag international sales lower. However, these are likely to be near-term headwinds that should not make investors sweat too much.
A look at the company valuation
Netflix stock is trading at a forward price to earnings multiple of 74. Its price to sales multiple of 9.4 might also seem sky-high. But growth stocks tend to trade at a premium due to their impressive metrics. Analysts expect Netflix earnings to increase at an annual rate of 36% in the next five years. Netflix has been a star performer in the last decade. It remains a top bet for long-term growth investors given the company’s focus on original content, huge market presence, and expansion potential in international markets.
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