Netflix, Inc. (NFLX) Stock Is STILL a Total Rip-Off!

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Even the most casual of investors know that Netflix, Inc. (NFLX) stock has been going bonkers recently. Indeed, in 2015 the stock gained an incredible 135%, making it the biggest winner in the entire S&P 500.

Netflix, Inc. (NFLX) Stock Is STILL a Total Rip-Off!So when Netflix reported fourth-quarter earnings Tuesday afternoon, expectations were high.

Wall Street expected NFLX to show 23% revenue growth and add more than 5 million subscribers to its already impressive subscriber base.

Even though the sights were set high, the streaming video giant managed to easily surpass what analysts were expecting on the metric investors have deemed most important — membership growth.

Netflix also crushed earnings per share estimates, sending NFLX shares soaring in after-hours action. In the minutes after the initial results, the stock was up as much as 12%.

However, the euphoric after-hours market celebration didn’t last long. In premarket action Wednesday, those gains had dwindled to less than 2%. As I write this, in the first few minutes of trading, NFLX stock was actually in the red.

Let’s take a look at the most recent numbers, and then I’ll tell you why NFLX deserves to be in the red, and why Tuesday’s earnings beat is meaningless.

Sell the News and the Incredibly Overvalued

Fourth-quarter revenue came in at $1.82 billion, a hair below the $1.83 billion analysts expected. Q4 EPS clocked in at $0.10, five times the consensus two-cent estimate. But the subscriber numbers were the focus of the report, and it breezed past consensus:

  • Domestic subscriber additions: 1.56 million, lower than 1.65 million guidance.
  • International subscriber additions: 4.04 million, higher than guidance for 3.5 million.
  • Total subscriber additions: 5.59 million, higher than guidance for 5.15 million.

The easy takeaway from this is that Netflix had another impressive quarter, so why shouldn’t NFLX stock take off like a rocketship? The logical takeaway from this is that the vast majority of Netflix’s subscriber growth is coming from overseas — where Netflix can’t seem to figure out how to be profitable.

Netflix lost $109 million in Q4 from international streaming operations on $566 million in revenue, for a contribution margin of -19.2%. In contrast, Netflix made $379 million in the U.S. on revenue of $1.106 billion, for a positive contribution margin of 34.3%.

It’s no revelation that the U.S. market is rapidly maturing, but the pace of its deceleration is concerning. The fact that its domestic growth was below guidance for the second straight quarter implies that its only profitable demographic segment will become a more and more insignificant part of the Netflix “story” over time.

Bernstein Research, in light of yesterday’s earnings, said it expects domestic subscribers to only reach the 55 million to 60 million level (there are about 45 million currently), and maintained its “underperform” rating on NFLX stock, which Carlos Kirjner and his team give a price target of $62/share.

As I conclude writing this story, NFLX stock is down about 5%. After being so overvalued for so long, I think the market is finally coming to its senses: A valuation of 272 times forward earnings is awfully hard to justify.

If you own Netflix stock, take your gains (or your modest short-term losses). A small ding to your pride, if that’s the concern, doesn’t hurt nearly as much as a huge ding to your bank account.

Until Netflix learns to be profitable overseas — and there’s no indication that will happen anytime soon — this stock will be priced to woefully underperform.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/01/netflix-nflx-stock-ripoff/.

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