Netflix, Inc.: Brexit Can’t Keep NFLX Down Forever

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nflx - Netflix, Inc.: Brexit Can’t Keep NFLX Down Forever

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It’s natural to think that a company like Netflix, Inc. (NFLX) would be a safe haven as the market reels in wake of the Brexit vote, but some Wall Street analysts say NFLX and peers have plenty to worry about.

Netflix, Inc.: Brexit Fears Can't Keep (NFLX) Down ForeverNetflix stock’s high valuation is predicated on a red-hot growth rate fueled by international expansion — and that leaves it exposed to significant currency risk. After all, a stronger dollar hurts revenue generated overseas when it’s converted into dollars. It also makes U.S. exports — including media — more expensive for overseas consumers.

As Needham & Co. analyst Laura Martin told investors in a research note:

“Netflix is also at risk because all of their growth story and capital investment is offshore.”

Currency pressures and falling demand touched off by a rising dollar would take a bite out of earnings. Add in the fact that Netflix stock is rather richly priced, and you can have a selloff on both lower earnings and multiple compression.

NFLX Stock: Been There, Done That

Keep in mind that NFLX trades at 83 times forward earnings on a long-term growth forecast of about 23% a year. That’s pricey and leaves little margin for error.

When sentiment on any name gets this overblown, anything that dents the outlook could send shares into a steep funk. Indeed, we’ve seen this happen to NFLX stock many times over the years:

  • In 2014, NFLX stock tumbled about 30% on two separate occasions
  • In summer 2015, NFLX fell 20%
  • From late 2015 to early 2016, Netflix stock dropped 35%
  • Earlier this year, NFLX suffered a decline of 20% from April to early May
  • And for the year-to-date? Netflix stock is down 25%

Stocks with stretched valuations do this kind of thing, but that doesn’t mean they can’t come back. Netflix has done so again and again. It’s just that it has been a volatile ride the entire way.

True, shares have been a dog over the last 52 weeks, but beyond that they’re massive market-beaters. Take a big step back and you can see why investors love Netflix despite its wicked volatility.

NFLX stock has a five-year beta of 1.77, according to S&P Capital IQ. When the market is going up, NFLX races ahead. When the market is selling off? Look out below. And for all this risk, investors have been rewarded with astonishing gains. Since the bull market was born in early 2009, NFLX stock is up roughly 1,500%. The S&P 500 has only tripled over the same span.

This is just a long-winded way of saying that as much as Brexit uncertainty might take the shine off Netflix shares for a while, the market has shown many times that it can’t kick its love for the name.

Bottom Line

NFLX has always been a pricey stock, and it’s hard to find companies this large with such outsized growth prospects.

If you can stomach the volatility — and the likely prospect for more downside in the near future — there’s a good case to be made for buying Netflix stock while it’s on sale.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/netflix-stock-nflx-brexit/.

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