Why You Can't Chill with Netflix Anymore

High beta stocks have taken a beating amid the market correction and Netflix (NFLX) is not exception to it. I already recommended shorting the stock a couple of weeks ago, and although the stock is considerably off its 52-week highs, I think it has more downside to offer. Given the market sentiment, I will not be surprised to see Netflix fall to $80, which is why I think investors should continue shorting the stock.


The primary reason why I think Netflix is a short is its lofty valuation. Netflix is currently trading at roughly 340x trailing earnings.
While growth companies tend to command a higher P/E multiple, Netflix is way overvalued and will continue moving lower.

Double digit subscriber growth has kept Netflix’s momentum alive as of now. However, I expect the company’s growth rate to slow down, which will definitely have a negative impact on its share price. Given the current market sentiment, it is impossible for Netflix to sustain its present valuation, which is why I think the stock can fall to $80.

Granted the company has a lot of room for expansion across the globe, but it is highly unlikely that it will grow into its current valuation. Netflix currently commands a market capitalization of over $40 billion and with competition increasing; it will have a tough time justifying that valuation.

Netflix has many competitors and the list is growing rapidly. Amazon Prime and Hulu Plus are Netflix’s primary competitors and can snatch market share from Netflix by improving the quality of their content.

Content Cost

Content cost is another threat that can stall Netflix’s strong growth. Netflix spent $2 million per episode on The Blacklist and $1.35 million per episode on The Walking Dead. And with competition increasing, investors can expect the price of content to go higher. Netflix may find itself in a bidding war in order to land a famous TV series and this can put downward pressure on the company’s profits.

As a result, I think investors should stay cautious about Netflix as its growth story is probably coming to an end.


I have been bullish on Netflix since mid-2014, however I think it is now time for investors to short the stock. While Netflix is already down considerably from its all-time highs, I think the stock is still overvalued and will struggle to justify its valuation in the current market. The growing content cost can also hurt Netflix’s margins going forward. As a result, I think investors should short Netflix to $80.
Published on Feb 1, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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