The Long-Term Trend That Makes Netflix an Awesome Buy

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Netflix (NASDAQ: NFLX) has become a clear alternative for cable.

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Instead of spending big money each month for a traditional pay-television package, people can cut the cord, and pay for the streaming service. That's trading a bill that averaged just-under $70 a month for the average American at the end of 2015, according to Federal Communications Commission (FCC) data for a $9.99 a month bill.

Of course, many people pay more than that for cable, making the idea of dropping it even more appealing. That's something that has been happening in ever-increasing numbers, which is very good news for Netflix.

Cord cutting is speeding up

The pay television industry has lost customers every year since 2012 while the number of homes with broadband has steadily grown. Dropping cable, or cutting the cord as it has come to be known, has become more attractive partly due to the existence of Netflix.

While cord cutting has been happening since 2012, as can be seen on the chart below, the number of people leaving cable behind has grown dramatically. That trend continued into 2017, according to data from Leichtman Research Group (LRG).

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"The pay-TV market lost about 410,000 subscribers in the first quarter of 2017. This marked the first time that the industry has ever had net subscriber losses in the first quarter of a year," said LRG President Bruce Leichtman in a press release. "The decline in subscribers should not be interpreted as solely driven by a sudden increase in consumers disconnecting services. The net losses are also a function of a decrease in new connects, partially due to some providers less aggressively pursuing lower value customers than in the past."

Basically there's a type of customer that only buys limited cable packages, and the industry has made less effort to even try to get those people. That's a bit of a white flag from the pay-TV industry, which understands that its value proposition simply has no chance with certain people.

Year Pay TV gains/losses Internet gains
2012 170,000 2,000,000
2013 -105,000 2,600,000
2014 -125,000 3,000,000
2015 -385,000 3,100,000
2016 -795,000 2,700,000
2017 (through two quarters) -1,065,000 1,190,000

Netflix stands to gain

Just because people are getting rid of traditional pay television packages does not mean they are giving up on the idea of watching TV. Netflix, with its array of original programming still offers a TV-like experience and the streaming service even has a number of hits rival or exceed the appeal of most broadcast or cable series.

In reality, a consumer can probably have more than enough to watch with Netflix alone. If they don't, a second streaming service like Hulu should be enough to keep even an avid consumer of TV busy, and the savings are obvious.

As people get rid of cable, but have broadband, Netflix becomes a logical addition. On top of that, as young people set up their own homes for the first time, it's likely they won't see the value in paying for a full-price, pay-TV package.

Add those so-called "cord nevers" to the growing number of cord cutters and you can see where Netflix will benefit from this trend. Even if cable companies lower prices by offering "skinny bundles" with fewer channels for lower prices, it's still very hard for them to compete with the streaming leader.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.