Whenever a hot growth stock loses momentum, shareholders get crushed. The reset in valuation can be deep and sudden. This has certainly been the case with Netflix (NASDAQ:NFLX). Since its all-time high of $304 in July, the stock is now at $70.43.
True, early in the year NFLX had a nice rally, reaching about $129 in February. But over time, sellers came in, and plenty of skepticism remains about the core business model.
Despite all this, should you buy Netflix stock? To decide, let’s take a look at the pros and cons:
Entertainment Destination: Netflix is a pioneer of video streaming, having launched its service in 2007. Since then, the company has continued to invest heavily in its platform. In all, it has 26 million global customers.
Netflix also has created an extensive ecosystem, with connections to a myriad of mobile devices and even gaming systems.
Global Potential: In the U.S., Netflix is having a tougher time finding growth. So, the company has been ramping up its efforts overseas, where there are now over 3 million customers and the quarter-over-quarter growth rate is 65%. The main drivers are the U.K. and Ireland. What’s more, it looks like Netflix is planning to expand into another country in 2012.
Valuation: With the plunge, Netflix’s stock has a much more reasonable valuation. The price-to-earnings ratio is 24. In fact, the stock trades at about 1 times revenues.
Slowdown: For 2012, Netflix says it will add 7 million new U.S. streaming subscribers. However, this is about the same as for 2010.
Costs: There’s a bidding war for the rights to stream video content. Unfortunately, Netflix doesn’t have enough scale to get aggressive with its dealmaking. As a result, the company has lost the rights to some of its content. One notable example is Starz, which had provided access to films from Sony (NYSE:SNE) and Disney (NYSE:DIS).
Competition: It’s fierce. Some Netflix rivals include Hulu, Amazon (NASDAQ:AMZN), Comcast (NASDAQ:CMCSA) and Dish Networks (NASDAQ:DISH). Many of these companies have much more resources than Netflix.
Even though Netflix has a great platform and the stock is much cheaper, it still face some huge challenges. The competition will keep the raising the pressure on Netflix. Besides, the costs of content will likely increase. According to Netflix’s 10-K, it has $3.9 billion in contingent liabilities because of its content deals.
Right now, the main source of cash for Netflix is its legacy DVD-by-mail business. But even this is feeling the impact of Coinstar’s (NASDAQ:CSTR) Redbox.
So in light of all this, should you buy Netflix stock? No — for now, the cons outweigh the pros.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.