Netflix Is About to Sink Massively and Here’s WhyNFLX) have finally stopped moving higher in 2016. Many analysts had been trying to call Netflix’s peak for a very long time and shares of Netflix finally started moving lower this year. Netflix is down over 15% this year, and its plunge will likely get worse. I can’t see Netflix holding onto such a massive premium earnings multiple for a long time. Investors shouldn’t draw comparisons with Amazon as Netflix’s valuation is unsustainable due to slowing growth. Hence, I think investors should sell Netflix before it gets worse.
Loss in both situations
At the present stage, the entertainment business is erratic, and trends vary according to the seasons.
Moreover, the media segment is comprised of several players amid brutal competition for top-line and content. Netflix faces robust competition from HBO, YouTube, Amazon, and various other companies. From the international point of view, the competition comes from everywhere, together with pirated content. To sustain in the international market, it is necessary for any company to provide original content and strive against well-established or upcoming players.
In the United States, Netflix must strive for both content as well as paid subscribers, and even a slight change in growth-rates will alter the company’s bull case. Apart from this, it is most important for Netflix to add and change the available library, so that it can generate a captivating product and maintain their subscriber count.
As Netflix grows its subscriber base, it will find itself in a never-ending loop of increasing expenditure. This means that Netflix’s costs will rise in accordance with its subscriber growth as the company will have to shell out millions of dollars to get new content, which in turn will lead to more subscribers. Netflix has been very prosperous in generating content, but it cannot be certainly said that this lucky streak will last long keeping in mind the erratic and inconsistent nature of entertainment trends.
However, if the company tries to reduce content costs, then the probability of losing or agitating subscribers becomes real. Netflix will face loss in both conditions as the market is beginning to come around. Therefore, it is mandatory for Netflix to do something that will help the company overcome this margin problem.
I don’t see how Netflix will manage to take care of this problem and I think its downfall is about to get worse. As a result, investors should stay away from the stock and shouldn’t use the pullback to buy more shares.
Published on May 24, 2016By Prudent Investor