Has Netflix become a utility?

The stock has done marvelously in 2020 but what’s up next for Netflix (Netflix Stock Quote, Chart, News NASDAQ:NFLX)?

More subscriber growth and more dominance of the streaming and media space, says Rob Lauzon, managing director at Middlefield Capital, who argues that Netflix has the solidity of a utility at this point.

Netflix has blossomed this year in the wake of COVID-19, the shuttering of cinemas worldwide and the further cocooning of families around their TV sets. The stock is now up 66 per cent as investors continue to flock to a proven winner in not just streaming but overall media consumption despite the rise in alternative offers from the likes of Amazon Prime and Disney.

All eyes will be on Netflix’s third quarter results due on Tuesday, with the company having projected 20 per cent year-over-year growth in revenue to $6.33 billion and a 42 per cent jump in earnings to $2.07 per share.

Analysts are even more bullish on NFLX’s quarter, projecting consensus estimates of $2.13 per share on a topline of $6.38 billion.

On subscriber growth for the Q3, management predicted adding 2.5 million new customers, while the consensus from the Street is an even more rosy 3.4 million.

“Our view remains that the unfortunate COVID-19 situation simply accelerated trends already in place… and Netflix is likely to remain as the dominant global SVOD player for the foreseeable future,” said analyst Jeff Wlodarczak of Pivotal Research in an October 7 note to clients.

Lauzon thinks while it’s hard to guess how the market will react to Netflix’s quarterly results —even if they come out strong— investors should be thinking more long term with this one, as its path to continued dominance is a clear one.

“It’s always a tough because Netflix is definitely a momentum stock and sometimes it runs up into earnings even though they meet expectations and it sells off, to only two months later recover and blow past that price that was previously at,” said Lauzon, speaking on BNN Bloomberg on Monday.

Lauzon advises to take advantage of any drops in the share price for NFLX.

“We continue to buy Netflix on dips. We continue to believe it is becoming the new method of media for TV, media, movies and maybe video games in the future,” Lauzon said. “Their international division is where you’re going to see the most growth, and I guess we’re a little bit blinded from that here in North America but they have a lot of dedicated content if you live in the UK or Spain or other parts of the world.”

“But, really, for everyone now, on their tablet or if they’re buying a new smart TV, as long as they’ve got Netflix they don’t even need to call Bell or Rogers for basic cable,” Lauzon said. “They’ve got movies, they got shows, soon you’ll probably be streaming certain news through through Netflix. So, it’s now a utility.”

“We continue to like it here. We’ve actually done more trimming of the stock, just with our risk parameters and our funds as it moves higher and hits new price levels,” he said.

“This company has continued revenue growth, subscriber growth, earnings growth and soon (I will give it a few years) it’ll be a free cash flow machine.”

There are those, however, who believe Netflix could soon stumble.

Writing for Film Daily, John Walker used the example of the program “Glow” to argue that Netflix’s recent cancellation of several popular shows (including “The Dark Crystal: Age of Resistance” and “The OA” could alienate subscribers.

“If the canceling trend continues post-COVID, then Netflix will lose subscribers,” Walker wrote. “As fast as streaming services gained subscribers during the pandemic, the fallout could be greater. Streaming fatigue is a real thing. People will look for a way out of their subscription. Netflix burning subscribers by canceling their favorite shows before they get a natural ending could be the straw that breaks the camel’s back for some people.

Writing for Insider, Kim Renfro agrees, arguing that even blockbuster shows like “Game of Thrones” and “Schitt’s Creek” need a nurture period.

“Netflix is killing its most interesting shows in their infancy and it could be the streaming giant’s downfall,” Renfro wrote. “In the seven years that Netflix has produced original content, the world of TV streaming has dramatically changed. Now Netflix is getting left behind in the race it started. Many of its unique and ambitious shows have been canceled before they could reach their full potential. And Netflix keeps churning out more shows each year, without replicating the breakout success of 2016’s “Stranger Things.”

Renfro noted that Netflix has an internal cost analysis system that tells them if a new program will lead to new subscribers. But she says some of its biggest hits would not have passed this test.

“If it had been a Netflix original, “Schitt’s Creek” probably wouldn’t have made it past season two. Ironically enough, the popularity of “Schitt’s Creek” boomed when its first three seasons arrived on Netflix in 2017,” she said.