Netflix Stock Up 14% In 2020 At $375 Despite COVID-19; Is It Sustainable?

by Trefis Team
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After almost a 14% rise in Netflix (NASDAQ: NFLX) stock since the beginning of this year, at the current price of $375 per share, we believe Netflix stock is likely to remain around the current elevated level considering the positive impact of the ongoing coronavirus crisis on streaming players. The stock is over 96% higher compared to where it was at the beginning of 2018, a little over 2 years ago. Our dashboard What Factors Drove 96% Change In Netflix Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price rise of the last 2 years is justified by the roughly 72% growth seen in Netflix revenues from 2017 to 2019, which was accentuated further by a 234% increase in net income, as net income margin increased from 4.8% in 2017 to 9.3% in 2019. Rise in EPS was marginally lower (compared to net income growth) at 230%, mainly due to a 1.4% increase in shares outstanding.

The rise in Netflix’s earnings was partially offset by a drop in the company’s P/E multiple until 2019. Netflix’s P/E multiple decreased from 149x in 2017 to 76x in 2019, which reflects a P/E decrease of close to 50% in 2 years. The drop in P/E multiple between 2017 and 2019 was mainly due to higher EPS, while the stock price did not register a corresponding growth as Netflix started losing subscribers in the US, driven by rising competition in the streaming space. However, the P/E multiple saw a marginal rise from 76x at the end of 2019 to 88x currently, mainly due to the impact of the coronavirus crisis, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The shutdowns in major cities across the globe has led to people sitting at home. Home confinement is likely to lead to higher demand for streaming services and home entertainment options. Netflix’s subscriber count is expected to increase in the near term, with more people streaming content. However, this rise is likely to be dented by strong competition from established players like Amazon and new entrants like Disney+. We believe Netflix’s Q1 and Q2 results will likely confirm the increase in subscribers and revenue. It is also likely to stick to its 2020 guidance, compared to companies in most of the other sectors which are expected to reduce guidance significantly.

NFLX stock is up by about 9% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 20%. Thus, Netflix’s stock has outperformed the broader market during this crisis so far. If there are no signs of containment of the virus around the Q1 earnings announcement, there is a possibility of the stock remaining around the current elevated levels. On the contrary, if there are clear signs of virus containment by end of April, the stock could see only a marginal downside.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.

 

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