Skip to Content

Why Netflix is a strong buy even in a depressed market

U.S. stocks took a huge plunge on Friday, driven by concerns over China and economic growth around the world. The technology sector took one of the biggest hits, as shares of companies like Apple (AAPL)and Facebook (FB) fell almost 6%.

Even the investor darling Netflix (NFLX) plunged by nearly 8%. But ugly as the market was, this might actually be a good time for investors to buy stock in the streaming video company, whose prospects remain bright. After all, entertainment is a staple that people tend to consume equally during good times and bad. When the economy is strong, people have disposable income to spend on movies and television shows; when it’s weak, inexpensive entertainment through a subscription model is preferable to expensive theater tickets and pay-per-view content.

More: Stocks battered in global market route; Dow plunges over 500 points

For this reason, and ironically, a depressed stock market actually makes Netflix’s offering even more valuable, and serves as a good signal to buy the stock.

The top cable companies in the U.S. lost more than 460,000 subscribers in the second quarter of 2015, according to recent reports by Pacific Crest and the Leightman Research Group. This shouldn’t come as a surprise given that consumers have been chafing at the restrictions and expenses of cable for a while and, more importantly, can now access content more cheaply online through Netflix, Amazon (AMZN), Hulu, and other sites.

The king of this latter pack is without a doubt Netflix, which boasts 42.3 million subscribers stateside. As a result of its reasonable subscription-based pricing, savvy mix of popular movies and television shows, and original programming like Orange is the New Black, the company has become the go-to source for filmed entertainment. Netflix’s subscriber base is bound to grow as more consumers step away from traditional cable and look for better alternatives.

 

The company’s subscriber base has risen dramatically over the last few years, driven partly by its aggressive expansion into international markets, which account for 31% of revenues.

After a splashy entry into Europe in 2014, the company is now preparing to break into Japan, a market with 30 million cable subscribers. The company no doubt hopes to untether these viewers from cable and Cowen analyst John Blackledge estimates that Netflix could reach 9.5 million subscribers in Japan by the end of 2020, according to the Hollywood Reporter. In addition to reaching Japanese audiences with American programming, Netflix will also import Japanese programs for American consumption.

More: Apple’s stock is now officially in a bear market

Netflix is currently available in over 50 countries and has plans to be in 200 countries by the end of 2016, including Italy, Spain and Portugal later this year (potentially adding 1 million subscribers). In Latin America, the company reached 5 million subscribers last year, which is projected to grow to 7 million by the end of this year, according to Bloomberg. In addition, several analysts predict that Netflix will surpass 100 million subscribers globally by the end of 2020. These are not numbers to be taken lightly.

The Chinese market, which Netflix wants to enter but where it faces daunting competition from local streaming providers, including Alibaba (BABA), could be a challenging prospect, especially with the recent devaluation of China’s currency and softness in the local economy. While this is certainly a risk for investors to take into account, it is by no means the primary driver for Netflix’s international performance and therefore only a cautionary factor.

In addition, while international margins remain a drag on domestic results, that pendulum should swing the other way in the near future as initial entry costs into new markets are recouped and replaced with profitability. Netflix is investing in its growth, which always carries an initial and temporary cost.

The company’s original programming remains a strong source of its appeal for viewers. Compelling and successful shows like House of Cards and a slew of movie co-production deals have turned a relatively static streaming video provider into a dynamic media company.

The company has doubled down in this area by rolling out more cutting edge shows like Marvel’s Daredevil and Sense8, and announcing its most expensive venture to date –a £100 million ($156 million) series about the life of British monarch Queen Elizabeth II, according to the Telegraph. Given the runaway success of shows like Downton Abbey, the new series, entitled The Crown, seems like a pretty smart bet.

Naturally, this strategy doesn’t come without a price-tag but the company estimates that 90% of its members have engaged with its original programming, indicating that it’s a popular feature of the service and a driver for subscriber acquisition/retention.

Netflix’s pricing, $7.99 per month for unlimited streaming content, remains an attractive value proposition for consumers. It’s cheaper than movie tickets, cable packages, an even some other streaming sites like HBO Now, which charges $14.99 a month. This cost effectiveness of Netflix remains one its biggest strengths — in good and bad economic times.

S. Kumar is a tech and business commentator. He has worked in technology, media, and telecom investment banking. He does not own any shares of the companies mentioned in this article.