Netflix, Inc. (NASDAQ:NFLX) is falling apart after earnings, with NFLX stock down by double digits in early trading.
In truth, it wasn’t actually Netflix earnings that were the issue — NFLX handily topped profit forecasts and saw impressive top-line growth yet again. The problem was subscriber growth not keeping up with expectations, both at home and abroad.
The NFLX stock bulls have long had a lot to crow about in this streaming video giant over the years. As first mover in the space, Netflix very much defined the medium for other companies including Amazon.com Inc. (NASDAQ:AMZN) with its Prime Instant Video service as well as efforts from old-school TV enterprises looking to protect their brand in a digital age.
And, of course, NFLX stock was the top performer in the S&P 500 last year.
However, the Netflix earnings disappointment shows that the best days of this tech icon may be behind it as growth slows, sentiment sours and the gains of previous years cannot be re-created.
Here are the five reasons you should dump NFLX stock now:
Subscriber Growth Slows: As mentioned, the biggest reason for the selloff today in NFLX stock is the shortfall in subscriber growth. Trouble was expected, with a disappointing forecast for Q2 revealed this spring, but when the prediction of growth was lowered from 3.5 million to 2 million, many analysts expected CEO Reed Hastings was simply being overly conservative. The fact Netflix finished with just 1.7 million new subs was shockingly bad, and portends the slowdown could continue to be worse than expected.
Competition on Price as Well as People: Amazon continues to expand its empire, HBO Go continues to find success … and amid it all Netflix is actually raising prices! That is not a recipe for success. Margins remain quite troublesome to come by, particularly overseas, and it’s almost impossible to hike prices when you’re trying to fend off competitors and keep your subscriber base growing. Worse, Hastings seemed to pooh-pooh the idea that the recent price increase — sorry, “completion of grandfathering” — was an issue, meaning we could see this tug of-war continue.
Addressable Market Issues: Let’s also throw one more sticky subscriber point on the fire: the idea that broadband penetration and reliability may not be as robust as many streaming video fans think. Particularly overseas, it may be unrealistic to think there are hundreds of millions — or in fact, even 100 million — of potential customers in markets like Asia and Africa. In Western Europe and the U.S., NFLX stock has enjoyed brisk growth thanks to communication infrastructure that does not exist elsewhere, and that will create a serious bottleneck.
Valuation Questions: When you’re an innovator smashing expectations, Wall Street is happy to give you a pass on the valuation question. But with a forward P/E ratio of 85, investors may not be willing to give NFLX stock the benefit of the doubt anymore.
Sentiment Matters: In this risk off-environment, where Donald Trump and the Brexit and another quarter of ugly corporate profits continue to weigh on investors’ minds, there’s not a lot of room for error in stocks broadly, let alone a momentum play like NFLX stock. Now that shares have dropped some 35% from their peak at the end of 2015, it’s fair to say that sentiment has rolled over … and it’s hard to imagine it reverting to bullishness anytime soon.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the stocks mentioned here.
