From Needham: Netflix Isn’t Immune to Coronavirus Impact


Netflix Isn’t Immune to Coronavirus Impact

Netflix’s valuation is tied to international subscriber growth, but if households lose income during the health crisis, the company could see more churn.

So far, Netflix’s stock has held up better than many of its large cap tech peers, but the outbreak isn’t just neutral for Netflix — it’s a negative, wrote Needman analyst Laura Martin in a note on Tuesday. There are a few reasons for that. Netflix shares were up 4.40% on Tuesday to $361.73 amid a halting partial comeback from Monday’s massive selloff.

Even if more people are staying indoors watching Netflix, its stock performance — which is tied primarily to subscription figures, not viewing minutes — won’t benefit from that, Martin wrote.

To the contrary: If the virus continues to spread worldwide, Netflix’s growth in international markets may actually be put at risk owing to economic impacts on individual households. At the very least, investors could see higher levels of churn among households that trim costs owing to financial pressures.

“Italy just quarantined its entire country implying millions of travel employees are not going to work or get paid, and travel globally has declined precipitously,” Martin wrote, citing one example. “Since NFLX is a luxury, we assume international churn will rise and offshore revenue growth will slow until COVID-19 retreats.”

Netflix’s valuation of roughly $160 billion as of Tuesday reflects its expected growth in key regions, such as Europe and Southeast Asia. Analysts are projecting 7.1 million international net subscriber adds on average for the March quarter.

As the virus continues to rattle global economies, there’s another potential problem for Netflix: Its debt-heavy balance sheet and expected negative free cash flow of $3 billion for 2020.

If the outbreak severely impacts credit markets, as some market watchers have feared, it could further compromise Netflix’s “junk bond” rating according to Martin — and since its annual content costs are mostly fixed, that could represent a “non-trivial” problem for Netflix if equity or debt markets tighten for any extended period of time.