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EvanBuck (99.81)

Netflix Bubble 2.0.

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September 10, 2013 – Comments (2) | RELATED TICKERS: NFLX

Netflix (NASDAQ:NFLX) stock has rocketed past a previous all-time high of $304.79 this morning.  According to some, this represents the perfect opportunity to short the stock since now the stock has reached a "double-top" in its chart.  With a P/E currently north of 370 and an $18.1 billion valuation, is now the time to declare "Netflix Bubble 2.0?" 

Personally, I will readily admit that I have no idea how the stock is most likely going to move after this new all-time high has been reached.  (No one truly knows.)  I know it's hard, but ignore the "all-time high" number and "double top" rhetoric and simply examine the facts about Netflix.  Netflix is truly a transformative company, but I believe that sooner or later its valuation will catch up to it sometime.  Therefore, this indeed might be the start of Netflix Bubble 2.0 based purely on valuation.  But, after NFLX potentially drops like a rock and all of the less resilient/patient investors have gotten out of the stock, I think there will be a great investment opportunity.  I would be tempted to load up on shares depending on how low the stock price goes.

Think about it.  Netflix is not a fad.  Netflix has changed how we watch movies and TV shows.  Netflix is making the concept of "cable-cutting" remotely feasible.  If the stock falls to ~$200, ~$100, or even a total crash to the ~$50's-$70's, wouldn't that constitute a big overreaction?  Of course, if that reaction is because of inherent flaws in Netflix's business model, rising competition, other unforeseen factors, etc. then that would be justified.  But consider that even at this level NFLX is trading at 4 times price/sales and 15 times price/book with a forward P/E of 92.  Any dramatic fall would bring NFLX down to a buy opportunity, at least in my book.

What do you think?  Is Netflix due for a market correction?  Or has Netflix rocketed past the point of no turning back?

2 Comments – Post Your Own

#1) On September 14, 2013 at 9:30 AM, MKArch (99.70) wrote:

Hi Evan,

 

I still expect in the long run NFLX will be crushed by the cable companies with their vastly superior pocketbooks. Per my NFLX red thumb pitch, the traditional premium movie services such as HBO and Cinemax roughly split their fee with the Cable companies who don't care which ones get the best and worst content because they get a piece of all of it. NFLX has disrupted this arrangement by cutting out the cable middle man thus enabling them to sell content at half the price of the traditional services. Sounds great but Comcast alone spends more on content than NFLX generates in revenues when NFLX undercutting the traditional services cuts into their revenue they also hit the cable companies. NFLX is on equal or better financial footing as the traditional services but they're a pimple on the butts of the cable companies and I wouldn't want to be betting the cable companies are going to sit idly by when their premium service revenues start taking a hit. IMO they'll buy up or skip the premium channels to bid directly for content with the aim to ensure NFLX demise. IE right now NFLX is sacrificing profits for market share, expect the cable companies to reciprocate once their premium channel revenue stream takes a hit.

 

Shorter term we know Hastings was blowing smoke a couple of years ago about a mythical virtuous circle of sub growth funding content as content costs swamped profits a year later leading to the infamous 60% price increase (to avoid BK) and raising cash in a secondary at 1/3 the price he was buying stock back a few months earlier. Hastings was playing games with the timing between signing up new content and recognizing the expense (by delaying the roll out of the content) in order to prop NFLX stock up as long as possible to feed his ego (IMO). I suspect he's doing the exact same thing right now and I'm with Michael Pachter on NFLX short term prospects.

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#2) On September 14, 2013 at 11:21 AM, EvanBuck (99.81) wrote:

Hi MKArch,

Thanks for your well thought out comment.  I still think NFLX will go up short term due to investor optimism, but only time will tell and probably some of the factors you outline might start weighing in on the stock.

Have a great day! 

Fool on,

Evan

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