Netflix (NFLX) stock will be one of the closest-watched securities of 2016.
Investors are anxious to see if international subscriber growth is sustainable, whether prices will rise, the effect of new competition and also if NFLX has room to run higher following a 140% gain in 2015.
In looking at the whole picture, one outcome is far more likely than the other.
The Most Likely Outcome for NFLX Stock
Unfortunately for Netflix stock owners, NFLX is going lower in 2016. Actually, I can’t say for certain that it will, but it most certainly should.
NFLX is a momentum stock, and such stocks tend to reach levels and trade higher far longer than logic and fundamentals suggest. The fact that Netflix’s market capitalization topped $55 billion in 2015 illustrates a momentum stock defying logic.
And because Netflix stock did so in 2015, the chances of it doing so yet again with another big year are almost unimaginable.
To get an idea of why Netflix’s current valuation is so ridiculous, consider the valuation of media giants Time Warner Cable (TWC) and Twenty-First Century Fox (FOXA). Both companies carry a $50 billion market capitalization, but TWC has 12-month revenue of $23.4 billion and FOXA has $27.2 billion. Furthermore, both companies are very profitable, with TWC and FOXA having operating income of $4.5 billion and $5.4 billion, respectively.
Meanwhile, Netflix has just $6.4 billion in 12-month revenue, and slightly more than $300 million in operating income. Clearly, there is a big disconnect between the sizes of FOXA and TWC versus NFLX. Thus, it is equally clear that much of Netflix stock price is tied to what investors hope it can become — a media juggernaut like FOXA or TWC.
The problem is that Netflix’s road to the top just became a lot more difficult. As explained in a previous article, “Netflix Stock Is Gearing Up For Another Epic Collapse”, competition has intensified by an almost unimaginable degree over the last six months.
Just about every large media company now has an over-the-top mobile streaming service for video content. This includes traditional media companies like Showtime and HBO, satellite TV providers with Sling TV, and also newer forms of content like Go90.
In other words, Netflix faces a lot of new challenges in 2016, and its stock is priced for absolutely zero mistakes.
The Big U.S. Problem for NFLX
What’s alarming for NFLX is that many of these services have launched during the last two quarters. Therefore, Netflix stock owners have not yet felt the effects of this new competition. Given that streaming services are far cheaper than pay TV, it is possible that cord-cutters maintain two or more streaming accounts.
After all, Internet speeds are getting faster, and with today’s options it is possible to maintain a Netflix and Sling TV account and get all the content of pay TV at half the cost. However, this is speculation, a best case scenario for Netflix, because there is absolutely no question that Netflix has the most to lose when it comes to subscribers.
During Netflix’s last quarter, it added 5.72 million U.S. subscribers for a grand total of 44.83 million here in the U.S. Therefore, NFLX penetrates nearly half of all U.S. households with a broadband Internet network (about 100 million according to Goldman Sachs).
With that said, international subscriber growth has been the catalyst for Netflix stock, but U.S. is key for driving long-term revenue and profit growth. Fact is that other parts of the world, where Netflix is growing subscribers, have much lower pay-TV prices, leaving little room for NFLX to hike prices long-term.
For example, cable prices in Europe are roughly half of what people pay in the U.S., and large-market opportunities like China and India are well known for having low pay-TV prices, like $10 per month.
As a result, the U.S. remains Netflix’s most important market for driving margin and long-term revenue growth via price hikes. However, all of this new competition could result in year-over-year U.S. subscriber losses in 2016. That is a real threat that not many NFLX bulls have considered.
With NFLX stock so expensive, thereby lacking significant upside, combined with the risks created from increased competition and rising content costs, it is hard to imagine that Netflix stock goes higher in 2016.
In fact, it is very possible that NFLX stock takes a turn for the worse and heads much lower.
As of this writing, Brian Nichols did not own any of the aforementioned stocks.
