Netflix Stock May Never See $400 Highs Again

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Netflix stock recently took punishment dropping over 10% on earnings before finding support in the $320 range. Like millions of others we have enjoyed watching movies, television shows, and documentaries on the streaming platform. Personally, I love to watch financial, business, and Wall Street related documentaries and it's the main reason I use the service, but am finding myself gravitate more to other platforms like Amazon Prime. Analysts and talking heads that claim the company has no competition are either crazy or "long and lying." Prime, Hulu, Sony Crackle, Tubi, Roku, Youtube, HBO, Showtime, Starz, and Disney are just a few examples and many more are coming in hot and fast. Hollywood is after them and important content is being pulled such as Friends, The Office, and Disney's movies (especially Marvel). Sometimes the innovator can end up getting the short end of the stick once smart and powerful competition finally shows its face. Bringing in top acting talent and keeping up key quality/original content is going to make all the difference down the road. They need to keep shows such as Narcos (one of my favorites) coming in on the regular...

Product: Don't get us wrong as we do think Netflix is a great service, but it's the stock price that lacks greatness in terms of long opportunity at these extreme price levels. My main issue is the increasing number of "B" movies and wasteful baloney that will never be watched and seems to be used as a content filler to make it appear as if there are more options. A lot of time is wasted searching for something and finding nothing. Content is always king and new fresh options are of max importance. I've noticed the same film options sit on the platform for what seems forever. Many A-list actors have been involved with what feels like "B" Netflix content. A major plus is the fact that commercials are not utilized (others like Sony Crackle bombard you). Nobody wants to deal with long drawn-out ads any more. People may be willing to put up with a few, but the days of ads dominating 50% of a film or show are on the verge of dying. In 2021 Netflix will lose popular show The Office and Disney is pulling their content at the end of 2019 for their own streaming service.

Valuation: Netflix has a current valuation of around $145 Billion (as of this writing) after the recent earnings drop on 7-17-19. The company reported earnings per share of 60 cents, past the Zack's Consensus Estimate by 4 cents but declining from year-ago earnings of 85 cents. Revenues jumped 26% year-over-year to $4.92 billion, which was in line with the Zack's consensus estimate. Netflix added just 2.7 million new subscribers globally in the 2nd quarter, missing the company’s own guidance of 5 million subscriber growth. It lost 126,000 subscribers in the United States versus the company’s 0.3 million expectation, but added 2.8 million internationally, down from the projected 4.7 million.  Subscriber growth is a major concern as it could be a sign that competition may be eating at the company. We believe the stock price is extremely high at current levels and clearly this is due in part to the rise of the broader market.

Bottom Line: When buying a stock you always want to be ahead of the game, not behind it. You want to be in before the move, not chasing when its peaking out, the market is in a bubble, and the stock price is clearly overvalued. Keep in mind that you can always enter again when the price is cheaper if you feel it has potential to get higher. Our target price on the stock in the short to midterm is $250 per share. On any intraday push we will be looking to attack with short sells or puts. The short interest is fairly low at 4%, so not as squeezable as something like Tesla, which is 30%. If the Federal Reserve does end up cutting rates it is possible NFLX could get climb some with the market, but we do feel its likely that previous highs of $400 represent a potential top and may not be seen again. If you're an investor who has benefited from the amazing 10+ year run, it's time to think about taking profits. Bull runs cannot go on forever despite how strong it may currently feel and the economy is showing signs of weakness. When confidence is unreasonably high, bad things can and will happen. In fact, market shocks tend to come during times like these. Moreover, the market is being dangerously propped up and held by the so called "Fed Put." Netflix has certainly benefited from this Fed/politically controlled market, but rest assured that when it does end, NFLX will be dragged down just like the rest.