With stock markets in free fall, investors are looking for safer havens and ways to hedge losses with eyes on companies with the potential to emerge from the present crisis in better shape than their rivals.
Toilet paper and bike makers and Netflix come to mind. Trading at $320 a share, Netflix is down ‘only’ 17% over the last month, compared with its main competitors — Comcast (24%), Disney (38%), and ViacomCBS (66%) in the same period.
And this despite EU Internal Market and Services Commissioner Thierry Breton asking Netflix CEO Reed Hastings to limit streaming to standard definition instead of high definition, which needs more bandwidth, to avoid online congestion.
Netflix’s business model is driven mainly by renewal rates and its famous cash burn approach should lessen as the company halts production. Production in the US and Canada has been stopped after The Witcher became the first major UK project to suspend filming. The company’s primary goal is to add new subscribers, a difficult goal in financially strained times.
Netflix’s large library size and recommendation algorithm are proving its key competitive advantage. Most of Netflix’s second-quarter output is ready to premiere on schedule, with new series online to debut such as #blackAF, NAILED IT!, Middleditch Schwartz, Ryan Murphy’s Hollywood, Octavia Spencer’s Self Made, Unorthodox as well as the third season of Ozark.
Credit Suisse found that first-time app downloads (new subscribers) are shifting to Netflix in affected regions such as Hong Kong, South Korea, Italy and Spain. Needham Co expect streaming revenue to decline 6% in the US and 28% in international markets. Some even believe that COVID-19 will move customers elsewhere in a crowded streaming market.
Driven by debt
In April 2019, Netflix borrowed an extra $2 billion (€1.8 billion) to fund content spending, and doubled this in October. This has been its strategy for some time as the company has racked up more than $12 billion in long-term debt, helped by the Federal Reserve’s slashing of interest rates to historical lows.
Despite generating more annual revenue ($20 billion plus) than its rivals, Netflix rarely runs a yearly profit due to its huge expenditure.
“This is a dream scenario for them,” Lynnwood Bibbens, CEO of Reach TV, an entertainment network, told Observer. “The worse thing for them is high interest rates as they plan to keep increasing their spend on original content. Debt lenders, in particular Morgan Stanley, will have no problem securing debt funding,” he said.
The video streaming platform was among the best performers during the $6 trillion global market rout last week. Analysts say ‘stay at home’ stocks such as Netflix and Zoom could provide a haven for investors during the coronavirus outbreak as more and more people are told to stay home.
The fitness startup Peloton Interactive, which makes exercise bikes and also offers online fitness classes, has seen its shares jump amid suggestions that coronavirus fears would prompt many fitness enthusiasts to ditch their gyms and opt for Peloton’s offerings.
Moderna Chief Executive Stephane Bancel (R) briefly became a billionaire after the company shipped an experimental coronavirus vaccine for clinical testing in humans, boosting its share price, Bloomberg reported. Malaysia’s Lim Wee Chai (L), who owns a majority stake in medical gloves maker Top Glove, also entered the billionaire’s club amid the outbreak.
Shares in teleconferencing startup Zoom Video have soared nearly 50% since February as investors bet on a rise in remote workplaces amid fears of the coronavirus spreading further. The company has already added more active users this year — 2.22 million — than it did in all of 2019, Bernstein Research analysts said.
Retailers such as Germany’s Rewe and France’s Carrefour have seen food items fly off their shelves in the past days as panicking shoppers stock up their pantries. The rush at the supermarkets is prompting investors to lap up shares of packaged food companies. Online retailers like Amazon are also seeing strong demand as virus-spooked shoppers avoid brick-and-mortar stores.
Makers of face masks, hand sanitizers and sanitary wipes are witnessing a surge in demand as shoppers seek ways to protect them against the rapidly growing virus. 3M Corp, which makes face masks among other things, is one of the biggest beneficiaries.
German software company TeamViewer that allows users work remotely is witnessing a brisk demand for its services, especially in China, the epicenter of the coronavirus. The Frankfurt-traded shares in the company have soared in the past few days.
Not all so positive
But not every analyst is as confident. Analysis from Needham Co. shows that Netflix may stand to lose revenue as employment uncertainty leads to fiscal restraint among consumers.
Netflix relies on subscription revenue set at fixed monthly increments. Increased viewership is good for the brand and may mitigate long-term churn rates, but doesn’t give any immediate financial benefit. Subscribers can in effect double their consumption in self-quarantine without adding to Netflix’s coffers.
“At least in the US, I think newer providers (e.g. Disney+) are more likely than Netflix to see a run of new subscribers because Netflix’s penetration is already so high,” Jon Giegengack, principal at Hub Entertainment Research, told Observer. “More viewing doesn’t equate to more revenue for Netflix or other ‘all-you-can-eat’ platforms.”