Netflix Stock Will Crash Despite a Coronavirus-Induced Traffic Surge

April 20, 2020 2:23 PM UTC
Online streaming services are seeing a surge in traffic due to coronavirus. This has pushed Netflix's stock higher, but the rally won't last.
  • While most of the world sits at home during quarantine, one would expect Netflix to profit from the situation as more people binge-watch their favorite content.
  • But Netflix’s business model is based on subscriber growth, not on traffic or total views. Paid advertising is virtually non-existent. 
  • This opportunity will instead be used by Netflix’s new rivals–Amazon, Apple and Disney–to snatch away market share. 

While the world waits out the coronavirus storm, online streaming services have taken off–and Netflix (NASDAQ: NFLX) stock has gone on a massive rally. 

At a time when the S&P 500 lost 13%, Netflix surged 25%. | Source: Tradingview

The cancellation of all sporting events across the globe has further boosted demand for online streaming services.

But Netflix’s rally could be short-lived as it slowly loses its top position in the online streaming market.

Tons of Traffic Doesn’t Mean Tons of Revenue

Netflix has seen a tremendous spike in visitors in recent weeks. In fact, the sharp rise forced the company to cut down traffic on network providers to reduce strain on their servers

But the fact is, for Netflix, more traffic doesn’t translate to more money. The company charges a fixed monthly price of $9-$16 in the U.S. regardless of how many hours a user spends on the platform. 

The traffic spike would have been profitable if it had an advertising-based model, but it doesn’t.

Netflix relies on strong subscriber growth to justify its lofty valuation. The subscriber growth count was already showing signs of weakening in 2019 and that trend is expected to continue with the arrival of new competition. 

Big Competitors will Eat Netflix’s Lunch

Netflix had gained all its market share by pricing out Blockbuster Video in the past. Netflix simply had deeper pockets, and Blockbuster Video was a dinosaur company that soon went bankrupt.

This time, Netflix’s competitors have much deeper pockets. Players like Disney Plus, Apple and Amazon can afford to subsidize the online streaming business thanks to profits from other business segments. 

The timely arrival of big competitors will put more downward pressure on subscriber growth.

Netflix’s Balance Sheet Needs Repair

Netflix’s growth has been driven by debt-fueled acquisition of new content. The company’s debt has been ever-increasing and now stands at a whopping $14.8 billion.  

Netflix had a debt problem even before coronavirus. | Source: Simply Wall Street

The company’s $5 billion in cash on hand won’t be enough as it had planned to spend $17 billion on content in 2020 alone.  

To increase profits, Netflix has been perpetually increasing subscription costs. But with new players entering the market, the company can only raise rates so far. 

The only way Netflix can clean up its balance sheet is by doing a capital raise that will dilute current shareholders. The market is yet to price in the fact that Netflix can’t service its debt without raising money.

Instead, the market seems to believe that the increase in traffic during the coronavirus-induced lockdown will benefit the company. But the earnings reports in the quarters to come will shatter that illusion and send the stock tanking.  

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com. The author holds no investment position in Netflix at the time of writing.

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Last modified: June 24, 2020 1:03 AM UTC

@TraderBased

Ayush is a financial blogger and a swing trader. He has roughly four years of experience covering the U.S. stock market and has consistently featured on Tip Ranks' list of top performing bloggers. He is based out of Indore, India and is also managing the portfolios of several local retail clients. You can email him on Ayush.Singh93@outlook.com