The jury remains out on the direction technology stocks might take going into 2019, after the fourth quarter rout that sent sector share prices tumbling. Some analysts believe it’s just a temporary blip in an environment where the US economy remains strong and there’s no real sign of a recession.
On the other side of the fence, however, are an array of analysts who believe the super-sales cycle for high-octane tech stocks is over, as interest rates inch up and cost pressures build. Our view is somewhere in between.
For some of the tech giants, we believe the current weakness hasn’t run its course. This is particularly true for social media companies facing problems that are more deeply rooted than market cycle fundamentals.
But for some marquee tech names, once the macro environment improves and any risk of a full-blown trade war between the US and China recedes, there's no reason to doubt that their upward journey will resume. Chief among these stocks is Netflix (NASDAQ:NFLX), the streaming video behemoth. It's at the top of our list and well-positioned to rebound.
Since reaching a record high of $423.21 in June, Netflix shares have given up 32% of their gains. Even after this massive plunge, with the stock trading at $286.13 as of Friday's close, Netflix is till up 42% in 2018. That's the best performance among FAANG stocks, the the group of technology companies which includes such titans as Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Google (NASDAQ:GOOGL).
The primary reason for our optimism for Netflix? The company’s success at attracting an increasing number of subscribers globally, in a variety of regional markets where the company is still in the early stages of expansion.
Though Netflix, too, is facing cost pressures and some saturation in its US home market, the global opportunity in streaming video is so big, it will take a long time before we see the peak of this growth segment. In the most recent quarter, the number of new subscribers Netflix added far exceeded analyst expectations.
After signing up 6.96 million customers during the third quarter, Netflix now has 137.1 million global subscribers. For 2018, the Netflix predicts a total addition of 28.9 million customers, a record for the 21-year-old company.
The key to this impressive growth is the company’s strategy to expand globally, into areas where there is still lots of room for growth. In the third quarter, 84% of Netflix's subscriber growth came from global jurisdictions, such as Brazil, the UK, Canada, and India.
There's really no secret to Netflix's success at attracting viewers. The company is spending billions of dollars on original programming. It churns out hugely popular movies and limited series, including such viewer, and critical favorites as House of Cards, The Crown, Ozark, and the animated comedy BoJack Horseman, as well as new series such as Insatiable and Maniac.
By flooding the market with new titles, Netflix is targeting all age groups, plus making it hard for viewers to go elsewhere. The streaming video provider released a breathtaking 676 hours of original programming in the third quarter. Even better, there's no sign that Netflix has reached a ceiling on that metric.
“There is so much growth ahead in streaming video entertainment, we’re going to focus on that for a very long time,” Chief Executive Officer Reed Hastings said during an interview with analysts in October. With this aggressive approach, some analysts fear Netflix may run out of cash if the capital markets turn ugly and another recession hits the global economy.
That scenario would halt the company’s torrid pace of growth. That, in turn, would seriously deflate NFLX's rich valuations.
Still, these types of risks are common for all high-growth stocks. As such, Netflix is obviously not immune. Nevertheless, in our view, Netflix commands a strong position in the streaming video market and is well-positioned to take advantage of the seismic shift that’s taking place in the entertainment environment, where customers continue cutting cords and ditching their cable providers.
Due to its low cost to subscribers—the standard monthly plan runs from $9.99 to $10.99 per month, superior technology and the depth of its content offering, there is no competitor that can pose a serious challenge to Netflix anytime soon. If you’re looking to take advantage of the current lower prices for some powerhouse tech stocks, and stash some strong shares in your portfolio, Netflix should be on your list.
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