Tech

Netflix stock should be avoided if lockdowns lift or a vaccine arrives, analyst says

Key Points
  • Investors should avoid Netflix stock if a vaccine arrives or if lockdowns ease, according to Alex DeGroote, founder of DeGroote Consulting.
  • The media analyst said lockdown initiatives being rolled out across Europe keep "people at home and that keeps them subscribing and less likely to churn."
  • Netflix is reporting its third quarter results Tuesday amid increasing competition from other streaming services.
A man watching Netflix on an Apple iPad Pro, taken on March 6, 2020.
Future Publishing | Getty Images

LONDON — Netflix shares should be avoided if there's a coronavirus vaccine or if lockdowns lift, according to media analyst Alex DeGroote, who owns DeGroote Consulting.

Speaking to CNBC's "Street Signs Europe" on Tuesday ahead of Netflix's third-quarter results, DeGroote said: "I would have seen Netflix, frankly, as a stock to avoid, should there be, for example, a vaccine, or should lockdowns ease greatly."

He added that the stricter lockdown initiatives being rolled out across Europe now "keeps people at home and that keeps them subscribing and less likely to churn."

Competition in the streaming market has soared in recent months as other companies have launched their own offerings as part of an effort to capitalize on the pandemic. In addition to Amazon Prime, Apple TV, and YouTube Plus, there's also new platforms like Disney+ and NBCUniversal's Peacock service.

"The rule of thumb is the average household will take about three subscription services, but at the moment we have potentially up to eight services on offer," said DeGroote. "There are just too many services for the budgets that most households have."

DeGroote believes some streaming services may merge or get acquired next year, while others may shut down completely.

"I think probably into next year, things will start to get tough, and that's when you might see M&A, or you might see some of the bigger operators, frankly pull their streaming services," he said.

Discounts keep customers subscribed

Netflix recently changed its discounting policy from a one-month free trial in the U.S. and the U.K. to a 50% discount for the first two months.

DeGroote, who does not own any Netflix shares, believes this was part of an effort to retain subscribers. "I would expect all the platform companies to be far more creative with their discounting over the next 12 to 18 months, as they try and strike a balance between critical mass, in terms of the subscriber base, and also frankly losing money," he said.

"The reality is that for most streamers, these businesses are not yet profitable," DeGroote added. "They won't be profitable until they have subscriber bases of a certain size, paying a reliable monthly subscription. That's probably a year down the line."

Netflix shares have risen by more than 75% since March, which is when the coronavirus pandemic started to spread significantly in the West.

The company's story has largely been about new subscriber growth but that may no longer be the case.

"In terms of Q3, the company has really quite skilfully guided down expectations," said DeGroote. "The expectations over net new subs in Q3 are relatively low at about two and a half million so it is more about whether they can beat that number. For what it's worth, I think they probably will."

Patrick Armstrong, CIO of Plurimi Investment Managers, told CNBC's "Squawk Box Europe" Tuesday that technology companies "are going to be winners in this environment."

Disclosure: Peacock is the streaming service of NBCUniversal, parent company of CNBC.