Why a recession could be good for Netflix

The streaming pioneer is stronger than the market thinks.

Family enjoying watching Netflix.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

In just a few months, Netflix (NASDAQ: NFLX) has gone from a market darling to market disaster.

The stock price is down more than 70% from its peak last fall, and it's not just because tech stocks, in general, have pulled back. The streaming leader posted a surprise decline in subscribers in the first quarter and guided to a loss of 2 million in Q2.

A combination of pandemic hangover and rising competition seemed to zap the company's growth, and its formerly reliable formula of plowing billions into original content is no longer paying off.

In the aftermath of the first-quarter report, Netflix announced two rounds of layoffs and signaled that it would scale back its content spending to focus on the bottom line. The company is also planning to launch an ad-based tier, a reversal from its earlier strategy, as co-CEO Reed Hastings had long dismissed ads as overcomplicated. 

There hasn't been much good news for Netflix this year, but there may be one area that investors can take heart in. With macroeconomic conditions deteriorating, Netflix seems better positioned to weather a recession than its peers. 

Is Netflix recession-proof?

Entertainment stocks generally fit in the consumer discretionary category, which by definition sees declines in consumer spending during tough economic times. But Netflix has bucked that trend in the past. 

During the 2008-2009 recession, most companies, including its tech peers, experienced significant headwinds from the financial crisis. However, Netflix's growth continued virtually unabated. In 2008, Netflix's subscriber growth increased 26% to 9.3 million, accelerating from the year before, and jumped even faster in 2009, up 31% to 12.3 million.  

Netflix was a very different company back then. It was exclusively a DVD-by-mail service, only operated in the U.S., and was much smaller than it is today. During that era, the company's primary competition was video stores like Blockbuster and kiosks like Redbox. Today, it's other streaming services like Walt Disney's Disney+ and Warner Bros. Discovery's HBO Max. 

The same principles that helped Netflix grow through the last recession still apply today. The company offers considerable value compared to other forms of entertainment. It has raised its prices several times in recent years, and the standard package now costs $15.49 per month in the U.S. and the basic plan is just $9.99 per month. Netflix is more expensive than its peers like Disney+, but it also has a bigger library than other streamers. Importantly, the standard monthly package is still much cheaper than a traditional cable plan, and similar to a single movie ticket, or one night of entertainment. If you're looking for value for your entertainment dollar, it's still hard to beat a Netflix subscription, which is an advantage in a downturn.

In a recession, consumer spending tends to gravitate toward options that are cheap and convenient, which perfectly describes Netflix's value proposition. 

Netflix vs. streaming competition

Unlike the last recession, Netflix isn't alone in the industry. It now faces direct competition in streaming from virtually every major Hollywood studio, and many of those have undercut it on price.

Netflix doesn't have a price advantage in streaming, but it does have an edge on its rivals in other ways. The company is still a pure-play streamer, so unlike Disney, HBO Max, or Paramount Global's Paramount+, it doesn't rely on box office sales or cable subscriptions to drive revenue. That's a clear benefit, as the transition away from cable is likely to accelerate in a recession, and tighter consumer spending could weigh on film studios' recovery.

Netflix also doesn't have exposure to theme parks, like Disney and Comcast, which are highly sensitive to macroeconomic conditions. Finally, Netflix derives a majority of its revenue from outside of the U.S., meaning its streaming business is much more diversified geographically, so its exposure to a U.S. recession is more limited.

Is Netflix a buy?

A recession alone isn't a good reason to buy the streaming stock, but its ability to withstand a recession is a reminder that the risks facing the company may not be as great as the market fears.

The company is still highly profitable, it remains the leader in streaming, and it's penetrating a huge market in Asia.

Netflix has also bounced from past growth setbacks, and the stock looks cheap at a price-to-earnings ratio of less than 20. While streaming pioneer seems unlikely to make a sudden recovery, investors are making a mistake if they forget it still has plenty of competitive advantages, including its upside potential in a down economy. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Jeremy Bowman has positions in Netflix and Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Netflix and Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. The Motley Fool Australia has recommended Netflix and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 

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