U.S. stocks have had a volatile week and a half following the S&P downgrade of the U.S. government’s long term debt and a threatening debt crisis in the Euro Zone. While Netflix (NASDAQ:NFLX) is most often recognized for its super charged growth and high flying valuation, we believe it could be a relatively defensive play amid a weak macro environment. The company’s streaming business is starting to take off, the company’s generating cash to fund its growth and it’s a value play for consumers looking to save a few bucks on entertainment rather than pay for premium pay-TV packages or for expensive movie nights. Netflix competes with other players like Dish’s (NASDAQ:DISH) Blockbuster, Apple’s (NASDAQ:AAPL) iTunes, Hulu and Amazon’s (NASDAQ:AMZN) streaming service.
Our price estimate for Netflix stands at $221 which is about 5% below the market price.
Limited Impact from Economic Slowdown
Not a Capital Intensive Business
Netflix is not a capital intensive company when compared to peers and with its focus shifting to streaming, we expect its capital requirements to decrease as a proportion of revenues going forward as more subscribers adopt streaming plans. At the rate at which the company is growing, it can generate enough cash to fund its capital requirements and fuel its growth and so it won’t need to tap debt markets.
S&P downgraded U.S. long-term debt last week on its looming debt burden. In the Federal Reserve’s meeting later in the week, the committee said that it would keep its funds rate target low through 2013. As these policies are accommodative in the near term, long term interest rates will likely rise as long term inflation expectations increase which would make corporate debt more expensive.
Low Penetration in its Markets
Cable companies and utilities often watch the housing market as a metric for the potential size of the market. Given the U.S. housing market is still sagging, this signals little growth for cable companies. However, Netflix has a low penetration of just about one-fourth of the present U.S. households. It has a long way to go before it reaches saturation levels and so there is ample room for growth in the U.S. market, which will receive a boost from its recent international initiatives as well.
Good Value for Cost Conscious Customers
In the event of an economic slowdown, or recession, the U.S. government may need to raise taxes to help cover future costs, and this could potentially lower the disposable income for many households.
This tends to have more of an impact on higher priced purchases compared to subscription services like Netflix. Although we can categorize subscribing to Netflix as a discretionary expenditure, its current prices are on the lower end of the scale when compared to other pay-TV services and so it could actually benefit if consumers are cutting back on these services.
Overall, we feel that Netflix has the right defensive ingredients that could help it flourish in a weak economy.
