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NFLX Stock – Are the Good Times Coming to an End?

Q2 earnings illustrate Netflix's continued successes on several fronts, but headwinds threaten to at least slow NFLX down

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor
Netflix earnings q2 nflx stock
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Netflix second-quarter earnings were pleasing on several fronts, but that doesn’t give investors the all-clear on NFLX stock.

Netflix (NFLX) just reported a solid performance for its second quarter, but investors have more reason for worry than cheer.

The numbers themselves were impressive: Netflix earnings came to $1.15 per share, more than double the year-ago period’s 49 cents, on revenues that improved 25.2% to $1.34 billion.

However, Wall Street already had expected the good news, with analysts looking for earnings of $1.16 per share on revenues of $1.3 billion. It’s a beat, but a small one, and coupled with warnings about third-quarter earnings, it’s understandable that NFLX stock is looking to open Tuesday’s trading only slightly up, if that.

Is this a sign that the big bull run in Netflix’s stock price — a run of more than 400% since early 2013 — is mostly over?

Netflix Is Doing It Right

Netflix’s huge investments in content, technology and infrastructure, while criticized at times, have been spot on. It seems as if NFLX has the Midas touch when it comes to developing original programming, as seen by the success of programming such as Orange is the New Black — the most-watched series on the platform in every territory — and other standout shows such as House of Cards. All told, Netflix’s programming has received a whopping 31 Emmy nominations.

Going forward, NFLX is showing no signs of slowing down on this front, with new productions including Marvel’s Daredevil and a talk show from Chelsea Handler of E! network fame.

This broadening content strategy has been key for increasing customer loyalty, but also bumping up user growth. Netflix’s subscriber numbers from Q2 bear this out. Net additions for NFLX came to 1.69 million, bringing the company’s total to more than 50 million. This was driven primarily by the international segment, which saw a 78% spike to 13.8 million. Netflix believes the market opportunity in Europe is 180 million broadband households, which is twice the size of the U.S., and thus the company plans on ramping up its footprint in Germany, France, Austria, Switzerland, Belgium and Luxembourg.

Moreover, Netflix apparently has pricing power, getting away with higher rates for its new two-screen-at-a-time HD plans, announced in May.

Really, it seems like there’s little to quibble about. However…

Bigger Factors at Play

For as much as Netflix is able to handle on its own, several larger forces might finally put a damper on the resurgence in NFLX stock.

One worrisome factor is the uncertainty regarding “net neutrality” laws. Unless the FCC implements changes, Netflix might be forced to continue paying to get access to faster Internet delivery, a la its deal with Comcast (CMCSA).

Competition continues to emerge and strengthen ranks. (AMZN) is bolstering its own original programming, as is Hulu. Even Yahoo (YHOO) is entering the fray.

Then there is 21st Century Fox’s (FOXA) $80 billion buyout play for Time Warner (TWX). Murdoch has been rebuffed for now, but he’s looking to create a Netflix-killer with the HBO asset, which has valuable series such as Game of Thrones and Girls — and that would be much richer by adding Fox’s own valuable content. Whether Murdoch continues to pursue HBO or goes after another similar large-scale media tie-up remains to be seen, but Netflix is in the crosshairs either way.

Bottom Line

None of the above is to say that NFLX stock will implode. As mentioned before, Netflix is making smart choices right and left, and should be able to navigate the larger headwinds and come out intact.

But what’s more likely, especially in the near future, is that Netflix’s growth rate will start to trail off, which is reasonable. For one, there’s no guarantee that Netflix’s winning ways in programming will continue; even successful producers have dry spells. Plus, the company itself announced that third-quarter earnings would be softened by costs related to its international expansion.

Mix all that with a forward price-to-earnings ratio of 65, and you have a recipe for a nap in NFLX stock.

For now, wait for better prices before jumping into Netflix.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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