The Netflix (NFLX) second-quarter earnings report in mid-July was tantamount to an Academy Award-winning performance. All seemed right, and Netflix stock surged.
But there’s little you can do when the market gets upset and investors go running for the exits, which is what has happened to Netflix stock in the past month. In the broader market’s correction mode, NFLX was crushed, and it now sits down by about 25% from its recent all-time high.
And investors may still want to stay clear of Netflix stock — the outlook resembles a horror flick more than anything else.
Consider the price action, which is definitely scary. NFLX has lost a quarter of its value in just a couple of months.
But the recent movement should be no surprise. Just as high-fliers can overshoot during bull moves, they can also be the target of relentless pummeling when the markets get shaky. And the plunges can be brutally quick.
Netflix Stock Loses Momentum
Let’s face it, Netflix stock was a great way — especially during the past year — for fast-money hedge funds to chalk up nice returns. But their interest is usually fickle. For the most part, NFLX stock became a “crowded trade” and probably dinged bit-time hedge funds like Coatue Management and Tiger Global, according to a recent post in Reuters.
But there were some other ominous signs during the past couple months. Perhaps most notably, billionaire investor Carl Icahn dumped his NFLX stock because he was get concerned about the valuation. (Though, in fairness, this was after making nearly $2 billion on the trade.)
And another billionaire investor, David Einhorn, has been ringing the alarm bells. His main concern is that Netflix stock continues to post negative cash flows. According to a recent investor letter, he quipped: “…apparently Red Ink is the New Black.”
Besides, the competitive environment is getting more and more intense for NFLX. Rivals include heavyweights like Amazon (AMZN), Hulu, CBS (CBS), Time Warner (TWX), Sony (SNE) and Comcast (CMCSA). There’s even buzz that Facebook (FB) will be a contender. In fact, Apple (AAPL) appears to be looking at creating its own original programming.
Now this is not to imply that somehow Netflix is a bad company. All in all, it is becoming the dominant brand in the fast-growing market for streaming. Keep in mind that the subscriber base is a staggering 65.6 million.
But again, there are considerable headwinds for Netflix stock. Hedge funds are likely to lighten up their positions so as to shore up their returns, the valuation is still at lofty levels (the forward price-to-earnings ratio is 325), and there is likely to be headline risk, such as from the traction from rivals.
In other words, investors should probably wait until Netflix stock stabilizes before jumping in.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
