Is the Netflix Bubble Starting to Pop?

Shares of Netflix (NFLX) dropped over 11% today after the company released its Q1 quarterly results. While Netflix’s earnings came in ahead of the analysts’ estimates, the company’s revenue didn’t meet the expectations.

For a growth stock, missing revenue estimates is always a red flag. However, things got gloomier for Netflix investors as the company revealed that its subscriber growth is expected to slow down drastically.

Netflix revealed it took in $1.96 billion in U.S. sales during the quarter, missing the estimates by a mere $10 million, and turned a profit of $27.7 million.
Netflix also said it expects to add 2.5 million new subscribers in the next quarter, a lot lower than the almost 7 million it added during the first quarter of the previous year.

Saturating growth

Many things point towards the fact that Netflix’s growth is saturating in the U.S. Although Netflix has a lot of room to expand internationally, its main market is the U.S., and investors are rightly worried about the slowdown in growth.

To counter the maturing business in the U.S., Netflix plans to hike subscription rates next month. However, maturing business spells trouble for Netflix investors because the company is still overvalued and in bubble territory. Despite today’s drop, Netflix is trading at 380 times trailing earnings.

At such a high earnings multiple, you’d expect Netflix to continue growing its revenue at double-digit speed for a long time. However, now that the company has accepted that its subscriber growth will slow down drastically, I think investors should prepare for more downside.

I have been bearish on Netflix for quite some time now and I have recommended shorting it multiple times. Growing expansion costs along with slowing growth in the U.S. are headwinds for Netflix. And given its current valuation, I don’t think the company can overcome these headwinds while sustaining its sky-high fundamentals.

Conclusion

With growth slowing down, I think the Netflix bubble is starting to pop. I would recommend investors to stay away from the stock or even short it. Given Netflix’s valuation, growth concerns, increasing competition, and growing costs, I don’t think Netflix will be able to sustain its current valuation for a long time. Amid growing competition, Netflix will find it difficult to increase its earnings. I find the current valuation unjustifiable, which is why I think the stock is a definite short for now.
Published on Apr 19, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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