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Why the "Stay At Home" Stocks Are Here to Stay: Netflix, Peloton, Zoom & Docusign

Tien Tzuo
CEO, Zuora

If you knew nothing about Netflix, Peloton, Zoom or Docusign before this week, you’d probably think they were about to wind up like J.C. Penny or Guitar Center.

Here are some sample headlines:

“Netflix, Peloton Bring Pandemic-Stock Era to Shuddering Halt,” Bloomberg.

“Is The Era of Stay-At-Home Stocks Over?” Forbes.

“Netflix Sinks as Wall Street Flees ‘Stay-At-Home’ Stocks,” TechXplore.

“The Bullish Work-From-Home Stock Trend Has Ended,” MarketWatch.

And my personal favorite (just because it’s so snarkily British):

“Pandemic Darlings Face the Boot as Investors Eye Return to Normal Life,” Reuters.

It is a truth universally acknowledged that journalists love a trend story. They also like to write about companies whose products they use every day. Here they’ve noticed that amid the recent market reaction to potential interest rate hikes, a few high-profile subscription companies have taken a haircut. So they respond with a bunch of stories that basically say: “Pandemic defeated! Normality returns! Back to the office! Say goodbye to the sweatpants stocks!”

What a bunch of nonsense.

During the pandemic, we spent a lot of time documenting the ways that subscription companies were able to capture all kinds of new business, primarily through their agility. Because they were designed to service customers instead of just sell products, they were able to react: spin up free trial promotions, offer discounts to steady customers going through a rough patch, capture downsells instead of churns, and generally give their customer base a giant bear hug.

As a result, hundreds of companies in the Subscription Economy, including the Stay-At-Homes (I’ll stop using that phrase after this column, I promise) captured a huge new cohort of customers. Just take a look at this graph that Netflix included in their latest 8-K:

What do you see here? One of these lines is not like the other! The growth rates are pretty consistent over the past four years, except for that bump in the Spring of 2020. And guess what? All sorts of subscription companies experienced that same bump. The Stay-At-Homes were able to capitalize on a Black Swan event, and captured four years’ worth of growth in six months.

Zoom grew its meeting participants by 2900% in 2020, and increased its year-over-year revenue by 317%. Docusign doubled its market capitalization. Peloton doubled its membership. Netflix picked up 36 million new customers. That’s why the narrative around slowing growth is wrong. The pandemic presented an opportunity for them to practically double their size overnight. These companies are materially different enterprises today. There’s no going back. And to value them at their pre-pandemic levels makes no sense.

And as far as the doom and gloom the headlines go, ladies and gentlemen of the Fourth Estate, I have some news to share: with their dramatically expanded subscriber base, subscription companies have lots of levers at their disposal! In fact, what we’re seeing now is a new focus on growing the value of those cohorts. How can they do this?

First, they can raise their prices. Take Netflix. Today they’ve become synonymous with television for over 220 million households. Sure, you might sign up with Disney and Hulu as well, but you’re not giving up Netflix. They have built an incredibly loyal audience; their churn rate is half the size of their competitors. And how do you know that audience is loyal? Well, they just increased their prices, and no one batted an eye.

Second, they can sell more services. For Peloton, that means allowing people access to the classes without the equipment, as well as introducing a new treadmill. With Docusign, that means offering new SMS and mobility solutions in their Business Pro tier. For Netflix, that means getting into games and potential in-app purchases.

Third, they can create new marketplaces and ecosystems that give other companies access to their subscribers. The Zoom app marketplace features dozens of services including games, project management, and note-taking apps. In October they launched an events platform that lets users create and monetize virtual events like concerts, lessons, and exercise classes.

These companies have all sorts of opportunities to keep their new subscribers happily surprised and consistently engaged. This is why so many B2B subscription companies emphasize net dollar based retention, or the amount of value they’re getting from a given cohort of subscribers over a period of time. Ideally that figure is over 100 percent – that’s right, even accounting for churn, a happy subscriber cohort continues to grow and grow in value over time.

This is also why the McKinsey and Subscribed Institute emphasize net retention rates over churn or ARPU in their latest Direct to Consumer Benchmark Report. Why? Because early tenure churn is high for most D2C companies, evaluating its effect on your long-term business can be difficult. ARPU is even trickier owing to upsells and downsells.

These journalists are overestimating the societal effects of the so-called “return to normal.” So we’re supposed to get rid of e-signatures now? I’m personally looking forward to returning to the office, but that doesn’t mean I’m going back to faxes and ballpoint pens! We’re not going to stop exercising wherever and whenever we want. Distributed teams aren’t going to stop teleconferencing. We’re not going to stop watching great content.

At the same time, they’re underestimating the value of the new subscribers these companies gained in 2020. They’ve come out of this pandemic with huge new audiences to build upon, and they’re not going anywhere. Now that the Black Swan has passed (knock on wood), these subscription companies can focus on growing the value of their new subscriber bases over the course of decades, not quarters.

Don’t bet against the pandemic darlings. You just might get the boot.

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