Company / Analytics

Analytics, 29 April 2020

Did any stocks gain during the COVID-19 pandemic?

The outbreak of SARS-Cov-2 pandemic has led to losses in some industries but also benefited others. Companies that are somehow correlated with the coronavirus such as those focused on diagnosing, treating, and preventing the outbreak, technology companies providing work-from-home applications (such as Zoom), and those providing entertainment and comfort to people sheltered in place with nowhere to go (such as Netflix) have seen their stocks gain during this season.

Netflix is one of the stocks that has gained an edge during the current crisis. Netflix published its first-quarter 2020 earnings report which we’ll use to provide analysis on the company. It is not surprising that people staying at home will be looking for something to entertain them, and Netflix is among video-streaming platforms that come in handy.

Revenue: Netflix’s revenues for the three months ending March 31 stood at $5.768 billion, a 27% year-on-year increase for the quarter. Profits almost doubled, from $344m in the first quarter of 2019 to $709m.

Earnings per share stood at $1.57. Shares rose 16%, with most of the gains coming since mid-March and the cancellation of nearly all live-entertainment events because of COVID-19. Netflix was one of only 30 S&P 500 components to gain in the first quarter.

Subscription: The number of subscriptions globally was up 22.8% to 182 million, the biggest three-month gain in Netflix’s 13-year history. This is not surprising given the lockdown measures across the world that has forced people to stay at home, and entertainment facilities closed. Netflix added an eye-popping 15.8 million new paying subscribers in the first three months. Over 2.3 million subscribers were added in the U.S. and Canada alone.

Netflix reported “seeing temporarily higher viewing and increased membership growth,” but warned this is likely to change “as home confinement ends, which we hope is soon.”

The company summed up the effects of the coronavirus on its business in three points: (1) subscriber growth “temporarily accelerated,” (2) revenue from subscribers abroad was hit “due to the dollar rising sharply,” and (3) with production on hold, “cash spending on content will be delayed.” The company reported that its supply of new movies and shows has not been jeopardized – at least for now. The company is looking to release all originally planned shows and films in quarter two (Q2 2020).

The surge in Netflix’s subscription supports a growing belief that video-streaming is likely to thrive even as other sectors sink. Netflix predicts it will add 7.5 million subscribers from April through June, nearly three times more than its average springtime gain of 2.7 million subscribers during the past seven years.

Competition: Netflix is facing increasing competition from the likes of Disney Plus and Amazon Prime, which are increasingly attracting new subscribers. For example, big brands like Disney which had leased many shows to Netflix are taking popular shows off Netflix providing their own services.

A recent survey showed that Disney+ and Hulu – also owned by Disney – are the most popular among first-time video streaming subscribers. A survey of 6,809 people in the U.S. in late March revealed that since the coronavirus outbreak, 29% of new subscribers chose Disney+, followed by Hulu (21%), and Netflix (15%). Apple TV+ was picked by less than 10%, Market Watch reported.

However, Netflix still has a competitive advantage over its competitors in that it has a high-volume catalogue of content and has even completed most of its programming for the year. In comparison, its competitors are still trying to build a catalogue whose production has been affected by shutdowns.

In the long term, Netflix is likely to face production challenges, which will be an industry-wide challenge. Globally, all filming has effectively stopped, and while Netflix may have content ready to launch in the coming months (Q2 2020), future launches will be affected by how long society stays in lockdowns.

The encouraging news is that except for filming, the creative industry which Netflix belongs can manage the crisis to a degree. For example, the writing of new scripts and the production of animated content can continue even during the current situation.

However, while the coronavirus is driving subscriber growth, the bigger question that Netflix faces is whether it can retain these paying customers after COVID-19. And this is the question that concerns investors.

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