Like several other COVID-19 beneficiaries, Netflix (NASDAQ: NFLX) endured a whiplash effect this year that has many stakeholders wishing they could turn back the clock near the beginning of the global health crisis. Benefiting from a “hostage audience” dynamic, NFLX stock soared during the worst of the pandemic. With COVID-19 fears fading, the narrative no longer is openly hospitable. Nevertheless, long-term demographic trends suggest that Netflix may be trading at a discount. I am bullish on NFLX.
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To recap, the initial onset of the COVID-19 crisis understandably panicked public officials. Due to lockdowns, streaming services such as Netflix thrived, invariably bolstering NFLX stock.
However, when fears of COVID-19 fell by the wayside, especially as government bodies loosened pandemic-related restrictions, consumers suffering from a massive case of cabin fever rushed out the door. Under a phenomenon known colloquially as revenge travel, people who previously deferred their vacations because of the crisis eagerly sought to actualize them. As well, consumers naturally grew tired of digitalized entertainment, instead desiring the real deal.
Not surprisingly, these broader headwinds impacted Netflix’s financials. As TipRanks reporter Swati Goyal mentioned, the company’s second-quarter earnings report demonstrated that “there is still much work to do.”
“Revenue rose 8.6% year-over-year to $7.97 billion but still fell short of the internal projection of $8.05 billion and missed Wall Street’s expectation of $8.04 billion.” As well, “Netflix shed 970,000 subscribers in the second quarter. While that was more than [the] 200,000 subscribers it lost in Q1, it turned out to be significantly smaller than the two million subscribers the company had feared it would lose.”
Not quite the performance that the streaming firm wanted to print in Q2, it does provide some evidence that NFLX stock is far from being a failing investment. With enough patience, bold contrarians can possibly eke out a substantial return, primarily because of demographic trends.
Interestingly, on TipRanks, NFLX has a 6 out of 10 Smart Score rating. This indicates that the stock is slightly more than likely to outperform the market, going forward.
Favorable Long-Term Demographics May Bolster NFLX Stock
Although the broader public focus concentrated on the COVID-19 crisis and the subsequent economic recovery effort, the U.S. Census Bureau also brought up a rather alarming development. Declining birth rates and international migration resulted in historically small population gains – just 0.1% in 2021. It represented the slowest rate of growth since the founding of the nation.
Should this trend continue to play out, it’s possible that content geared toward an adult audience would be fundamentally more attractive than content focused on children. While this framework would extend decades, theoretically, current demographic trajectories suggest that Netflix is better positioned for future growth than rival Disney (NYSE: DIS). Unless the population pyramid starts to tilt decisively younger for the U.S., Netflix stands to absorb a larger addressable market.
In other words – discounting unusual Benjamin-Button-type of cases, people not only age as the years go by, but their tastes become refined. Subsequently, Netflix’s grittier programs, such as Narcos, may attract the 18 years and up crowd. Further, from 18 years until the grave, such adult-focused content will consistently attract a wide demographic. On the flip side, Disney cartoons, for instance, only feature a narrow period of attraction.
Once kids reach a certain age and/or maturity level, they’ll probably not consume family-oriented content except for exercising rare bouts of nostalgia.
The Benefit of Lower Expectations
Another factor that may help NFLX stock rise above the muck of the post-pandemic new normal is lower expectations. Though rival Disney features an enviable content empire and far more memorable franchises, it must also deal with greater expectations. Even the Magic Kingdom doesn’t always get it right.
That’s not to say that Disney is a bad investment because it features some bullish angles in its own right. However, the company – because it owns fan-favorite franchises – must strive to deliver bigger and better. Such a trajectory may not be sustainable indefinitely.
For instance, Screen Rant mentioned that while The Book of Boba Fett on Disney’s streaming platform enjoyed pre-release hype, the end product “proved something of a letdown.” Frankly, it was bound to happen. Companies can’t expect to keep knocking it out of the park every single time with their products.
On the other hand, while Netflix also courts pressure, it’s not quite to the same magnitude. With the freedom to create franchises rather than to build off almost religiously sacrosanct brands, fewer consequences exist for getting off on the wrong note. Therefore, NFLX stock may organically benefit from not being under the content pressure cooker.
Is Netflix Stock Expected to Rise?
Turning to Wall Street, NFLX stock has a Hold consensus rating based on nine Buys, 18 Holds, and five Sell ratings. The average NFLX price target is $242.00, implying 8% upside potential.
Conclusion: Worth Keeping on the Radar
Understandably, NFLX stock represents a high-risk, high-reward venture. Those that can’t tolerate the possibility of severe market downgrades may want to stay on the sidelines. At the same time, the broader framework suggests that Netflix isn’t nearly as terrible as some analysts suggest it is. For the contrarian, it’s well worth keeping on the radar.
