This article is part of a series tracking the effects of the COVID-19 pandemic on major businesses, and will be updated. It was originally published on April 7.
While most prominent tech companies are fretting about the effects of the COVID-19 pandemic, Netflix Inc. may become even more important in the daily lives of Americans forced to stay at home and in front of their televisions.
The shelter-in-place orders across America, combined with the loss of live sports, could accelerate the adoption of the types of streaming services that Netflix NFLX, -2.02% pioneered. Early returns showed that paid subscriptions for streaming TV and video jumped 32% the week of March 16, according to Recurly Inc.
While a mass move to streaming from viewers who had held on to cable bundles could validate the years-long prophesy of Netflix Chief Executive Reed Hastings, there are still reasons to worry. To put a name on them, it would be Walt Disney Co. DIS, +1.66% , Apple Inc. AAPL, -1.15% and Amazon.com Inc. AMZN, +0.70% , along with a few others.
Hastings has repeatedly said that competition would benefit Netflix in the long run because it moves people to stream even more, but increased competition weighed on Netflix’s forecast for the first quarter, and is especially troublesome in the U.S., where growth has been an issue. Domestic net subscriptions have declined in 10 of the past 12 quarters, based on data compiled by Antenna.
A principal cause early last year was price increases, followed by heightened competition from Disney and Apple in November. (In February, Disney reported 28.6 million subscribers of Disney+ and 30.7 million for Hulu. Apple has not disclosed Apple+ subscriber numbers.) Netflix ended 2019 with 167 million subscribers worldwide, 61 million of them in the U.S.
Two recent surveys underscore Netflix’s competitive challenge.
Disney+ and Hulu — also owned by Disney — have emerged as the most popular sercices among first-time subscribers, according to a survey of 6,809 people in the U.S. in late March by TV analytics company EDO. Since the coronavirus outbreak, 29% of new subscribers chose Disney+, followed by Hulu (21%), and Netflix (15%). Apple TV+ was picked by less than 10%.
Of those considering adding a new streaming service, Hulu, Netflix, Disney+ and Amazon Prime Video emerged as the first four choices, according to a poll of 1,000 people in late March from Kagan, the media research unit within S&P Global Market Intelligence.
What differentiates Netflix, and could give it a competitive advantage, is the volume of its catalog and the fact it has completed most of its programming for the year. While others are trying to build a catalog and are coping with production shutdowns, Netflix is benefiting from the viral popularity of its documentary series “Tiger King.” The company also has lined up an array of impending releases such as “#blackAF” (April 17), a mockumentary sitcom from “Black-ish” creator Kenya Barris, and “Never Have I Ever” (April 27), a coming-of-age comedy series about an Indian-American teenage girl, inspired by producer Mindy Kaling’s childhood.
Last year, Netflix released 2,769 hours of original programming, compared with 1,537 hours in 2018, according to an Omdia report. Netflix offered 657 first-run original titles in 2019, compared with 386 in 2018.
Netflix reports fiscal first-quarter results on April 21.
How the numbers are changing
Revenue: Average analyst expectations were $5.76 billion at the end of 2019, but have declined to $5.74 billion as of April 6. Paid net additions of subscribers, a key indicator of Netflix’s sales, have slipped from 8.5 million to 7.42 million in that time period, according to FactSet. For the full year, FactSet expects revenue of $24.26 billion.
Earnings: Average analyst expectations from FactSet were $1.21 per share at the end of 2019. As of April 6, they were $1.61 per share. For the full year, analysts expect earnings of $5.94 a share.
Stock movement: During the first three months of 2020, shares rose 16%, with most of the gains coming since mid-March and the cancellation of nearly all live-entertainment events because of COVID-19. Netflix was one of only 30 S&P 500 SPX, -0.16% components to gain in the first quarter.
What the company is saying
March 22: All Netflix productions have been shut down, but the company has enough new content for the next few months, Ted Sarandos, Netflix’s chief content officer, told CNN Business in an interview. The company established a $100 million relief fund for production crews.
March 19: Netflix said it would reduce bit rates across all of its streams in Europe, effectively cutting traffic 25%, to preserve the smooth functioning of the internet during the coronavirus crisis. It did so after European Union industry chief Thierry Breton requested it to prevent overload as more consumers view content from home during the crisis. Netflix had 51.8 million subscribers in Europe, Africa, and the Middle East at the end of 2019, according to FactSet.
March 2: “[W]e’re 55% penetrated, roughly, in the U.S. And if we take that out to the rest of the world and you kind of do the math on that and when it would — you know, we talk about it as the addressable market, and you’re at 400 million to 500 million-plus paying member business, which is a pretty good place to be,” Netflix Chief Financial Officer Spencer Neumann said at a Morgan Stanley conference. “But we’re not — we’re also not conceding that we’ve hit some sort of a ceiling in the U.S.”
What analysts are saying
• “We expect the stay-at-home era to have both near-term and long-term benefits for Netflix. We expect the near-term benefits include some combination of reduced churn, increased gross adds, and higher ARPU (trade-ups to plans allowing more concurrent streams). We believe as an increasing number of people experience Netflix, at an especially high rate of usage, they will be loath to go back to life without it. The adoption of streaming will be accelerated and further ingrained into the culture.” — AB Bernstein analyst Todd Juenger, maintaining an outperform rating, and raising Netflix’s price target to $487 from $423, on March 31.
• “Although hours streamed are growing during COVID-19, we prefer Roku Inc. ROKU, -1.88% , which has a volume-based revenue model (ie, advertising CPMs) based on viewing time rather than NFLX, which charges the same price regardless of hours viewed.” — Needham analyst Laura Martin, maintaining underperform rating and price target of $332.83, on March 23.
• The most virus/recession-resistant stocks, according to RBC Capital Markets, are Akamai Technologies Inc. AKAM, -2.61% , Amazon.com Inc. AMZN, +0.70% , Chewy Inc. CHWY, +0.27% , Netflix, and Spotify Technology SPOT, +4.15% . “NFLX provides the ideal entertainment-in-place solution and should benefit from reduced churn rates.” — RBC Capital Markets analyst Mark Mahaney, maintaining buy rating and price target of $420, on March 20.