Is This the Start of Netflix's Demise?
I have been bearish on Netflix (NFLX) since the start of 2016 and have recommended shorting the stock multiple times when it was trading over $110. Yesterday, Netflix released its quarterly earnings and this may be the start of the bubble bursting.Netflix has traded at bubble-ish valuations for quite some time. The only reason why Netflix was able to sustain its valuation was its strong growth. However, the latest earnings report indicates that competition is finally catching up to Netflix and the company will not be able to sustain strong growth going forward.
Although Netflix managed to meet the revenue estimates and beat the earnings estimate, the international and domestic subscriber count growth was way below the consensus, causing the stock to crash over 14% in after-hours trading.
In the domestic streaming segment, Netflix added only 162,000 subscribers, falling way short of the 500,000 estimate given by management earlier this year.
A company trading at triple-digit trailing P/E ratio cannot afford to miss estimates by such a large margin. Given the severity of the miss, I am surprised that the stock is down only 14%, which equates to $6 billion in market cap.
A company can’t continue growing at double-digit speeds forever. This is a reality that Netflix investors were turning a blind eye to. With increasing competition in the domestic market, it was only a matter of time before Netflix’s subs count slowed down drastically. While overseas market may drive subscriber count, it won’t drive earnings as rapidly as many bulls expect.
People in India and China have low per capita income, and are thereby less likely to buy Netflix’s subscription. Moreover, the promotional expenses will be very high for Netflix to generate any profit in the short term.
Netflix’s earnings miss may be the start of the demise. Despite the mega-drop, I am still bearish on Netflix going forward. I expect the stock to fall to around $70 in the months to come and would advise investors to stay away from it.
Despite the drop, Netflix is still trading at 85x forward earnings, which is very expensive. Growing competition in the domestic market will curb Netflix’s subs growth, whereas the international market is not as big of a tailwind as many bulls think it is. Hence, I think investors should stay away from the stock, and look for a rally to open up a short position.
Disclosure: No position
Published on Jul 21, 2016By Ayush Singh