Last year, after Netflix, Inc. (NFLX) underwent a 7-for-1 stock split, shares of the streaming video company traded pretty routinely above $100 per share. There were some pullbacks here and there, but for the most part, you could find the Netflix stock price above the century mark.
It has come to be an important psychological level for NFLX stock owners, but after Wall Street kicked off 2016 with such a miserable January, the $100 per share level has been pretty elusive.
Netflix, along with a number of other volatile, high-risk, high-reward names like Amazon.com, Inc. (AMZN), had retreated well below its recent peaks by mid-February. NFLX got as low as $82. But a recent surge brought shares above the $100 level again briefly, begging the question: Can the Netflix stock price hold $100 for any meaningful amount of time in 2016’s risk-off environment?
And the answer, in all likelihood, is “no.”
NFLX at $100? Not in 2016
Consider briefly the manner in which Netflix shares recovered to their $100/share level last week, when NFLX rallied 8.7% in the five trading days between Feb. 29 and Mar. 4. That’s a phenomenal five-day gain, but shareholders should look at those gains skeptically for a few reasons.
Firstly, the S&P 500 itself was up 3.5% over the same period — last week was an out-and-out bull run, and any stock that didn’t rally is likely to have serious issues. The fact that Netflix, which is typically thought of as a high-beta stock, gained more than the broader index shouldn’t be particularly surprising.
The second, and perhaps more important point is that NFLX traders were well aware of one monster event that was coming up for Netflix: The release of season 4 of its mega-hit series, House of Cards, which was released on March 4. In the past, big releases have been responsible for bringing in new subscribers, and ridiculous subscriber growth will certainly be needed to keep NFLX stock above $100 for any period of time.
Note, however, that this enthusiasm was short-lived. NFLX stock is down more than 4% today, as short-term traders trading the House of Cards pop flee en masse.
As Netflix shares fall today, they are bearishly breaching one important technical indicator — the 50-day simple moving average, which sits at $99.95. Its 200-day SMA is at $105.33, and the fact that Netflix stock trades below both of those numbers is bad news.
I firmly believe that 2016 will be a year where the high-growth stocks of yesteryear come back from their lofty highs, and the reliable, perhaps somewhat more bland cash cows outperform. Certainly well-established stocks that dish out dividends will be well-rewarded.
NFLX, of course, has no dividend.
That’s because it’s pouring everything it has got into content and overseas expansion. Bloomberg reported late last week that Netflix has committed an astounding $5 billion in 2016 alone to creating and acquiring content for its service. That’s more than Time Warner Inc (TWX), Twenty-First Century Fox Inc. (FOXA), Viacom, Inc. (VIA), Walt Disney Co (DIS) or Discovery Communications Inc. (DISCA).
While I think there’s no doubt that Netflix’s willingness to invest in a strong portfolio of content is one of the reasons we see such strong revenue growth, it’s also one of the things that weighs most heavily on its bottom line, which at the moment simply does not justify a valuation above $100/share.
NFLX stock trades for 90 times 2017’s expected earnings, which is quite a premium to pay in any market. But in a market that’s increasingly wary of bubbles and volatility, I don’t think investors will be willing to pay that sort of premium for much longer.
I certainly wouldn’t.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
