Is Netflix's Growth Story Over?

Netflix (NFLX) has had a stunning run in 2015. The stock has been moving upwards for quite some time now and has managed to sustain its ridiculous valuation despite the ongoing market correction. The stock has only lost 6% of its value in 2016 despite the market-wide selloff, however I don’t think the company’s upward trajectory will continue much longer as the reality will soon catch up to the overvaluation. Hence, I think investors should avoid Netflix for now and wait for a better entry-point the future.

Growth is still strong

Netflix provides a very important service at a very affordable price, and as a result, the company’s stock has skyrocketed over the last few years.
The company is slowly expanding its wings across the globe and I expect its strong user growth to continue. Netflix’s user base will continue to grow as it enters new market.

Netflix recently entered India and there are still many other markets that the company can enter in order to propel user growth. All in all, Netflix’s user growth will remain strong throughout 2016.

But…

Despite Netflix’s strong user growth I don’t think the stock will move higher this year. The primary reason why I think Netflix has peaked is its overvaluation. Netflix is currently trading at over 350 times trailing earnings and it is clear that investors have already baked in years of future growth into its present share price.

Moreover, Netflix’s profit margins are razor thin. The company’s low subscription price, which has been a growth driver, will prevent it from growing into its current valuation and thus, I think investors should Netflix for now.

Netflix has managed to sustain its valuation amid the ongoing market correction, but the stock will not stay above $100 for long, which is why I think investors should sell the stock and book profits.

Conclusion

Short sellers have been targeting Netflix for quite some time now and haven’t enjoyed any success. Netflix has been overvalued for quite some time now, which makes it difficult for short-sellers to correctly time the market. However, given the current overvaluation of the stock, I think buying the stock is as risky as shorting it. Clearly, Netflix is not a stock for conservative investors and the stock could move either way going forward. Due to its current valuation, I am bearish on Netflix. However, I wouldn’t recommend investors to short it. I think investors should just sell the stock and wait on the sidelines for a better entry point.
Published on Jan 20, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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