- Netflix, which some equity analysts viewed as coronavirus-proof, could still be hurt if the pandemic spurs an economic downturn, analysts at Needham said in a March 10 note.
- One big reason Netflix could be at risk is that much of its revenue growth is international, including markets like Europe and Asia that are especially vulnerable to the virus.
- “Netflix is a luxury at a time when paychecks from employment may have stopped,” the Needham analysts wrote.
- The could drive more cancellations and slow revenue growth abroad.
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Shares of Netflix haven’t been hit as hard by the recent stock market slide as many other US companies.
Analysts at investment firm MKM Partners recently put the streaming giant on a list with other “stay at home” stocks that could benefit if people are self-isolating, avoiding travel, and generally spending more time at home.
However, another Wall Street firm, Needham, said that Netflix could still be hurt if the coronavirus continues to spread internationally, forcing people around the world to take time off work.
There are three key reasons the virus could be bad for Netflix, Needham analysts Laura Martin and Dan Medina wrote in a March 10 note:
- International subscriber and revenue growth could be at risk if the streaming service becomes viewed as a luxury in the international markets that are most vulnerable to the COVID-19 virus.
- Netflix’s content commitments are fixed, and slowing international revenue growth could exacerbate its cash flow and debt problems.
- Netflix charges fixed fees to subscribers each month, and does not make more money when existing subscribers spend more time watching.
“Several clients have called us asking if Netflix is a beneficiary of [the] COVID-19 [virus] because audiences will spend more time at home watching Netflix,” the analysts wrote. “We believe COVID-19 is negative for Netflix.”
Netflix, which has a market cap of around $155 billion, is largely valued today on its rapid international revenue growth. The company is growing fastest in markets like Europe, the Middle East, and Africa, and Asia-Pacific, which are among the most vulnerable to coronavirus outbreak right now.
While people in those markets may spend more time at home — and therefore have more time to stream video — a subscription service like Netflix could also be viewed as a luxury for people who have been forced to take time off work.
“Netflix subs and revenue growth are increasingly at risk as COVID-19 spreads because Netflix is a luxury at a time when paychecks from employment may have stopped,” the Needham analysts wrote. “Since Netflix is a luxury, we assume international churn will rise and offshore revenue growth will slow until COVID-19 retreats.”
Netflix has also been burning cash to pay for its content commitments, which totaled $19.5 billion last quarter. The company said it would start improving in 2020 its negative free-cash flow, which hit negative $3.3 billion in 2019. But that could be challenging if revenue growth slows internationally.
If Netflix runs short on cash, it could have to raise capital to cover its content bills, the Needham analysts said. And Netflix has a junk-bond credit rating.
“If the equity and/or debt markets close for any extended period, this could represent a non-trivial problem for Netflix,” Needham analysts wrote.
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