At least one prominent bear thinks Netflix, Inc. (NFLX) is a bad bet for 2016 because of declining earnings estimates, but heightened competition could be the real killer for NFLX stock.
Of course, before making any call on Netflix stock, you have to remember that it has made fools many times over of bulls and bears alike.
For the year-to-date, NFLX is up more than 135%. Indeed, along with Facebook (FB), Amazon (AMZN) and Alphabet‘s Google (GOOG, GOOGL) — the so-called FANG stocks — Netflix is carrying the market on its back this year.
Last year was a different matter entirely. At one point in 2014, Netflix stock was up about 30% and yet it finished the year with a 6% loss. And the year before that, NFLX rose 300%.
So this is a tough name to figure out. On the one hand, Netflix looks great because it’s following the Amazon playbook. That’s where the bottom line takes a backseat to the costs necessary for imperial expansion. No, NFLX will never rule the world like Amazon wants to, but it could dominate in video distribution and content.
And — just like AMZN — sometimes the market freaks out about how expensive imperialism can be.
NFLX has intends to cover the entire globe with streaming services — a staggering 200 countries — by 2017. If that weren’t costly enough, Netflix is investing heavily in original content.
The company already has 10 original drama series, six comedies, 32 stand-up comedy specials, 24 documentaries and much, much more. It wants to double its output in 2016.
All of this is hell on profits in the short term, but it may not matter. After all, bulls aren’t playing that game.
It’s the promise of future riches that has the market paying insane premiums for stocks like AMZN and NFLX. In the case of Netflix stock, shares change hands for 450 times future earnings. The broader market goes for less than 18.
Netflix Stock Is Doing Battle With the Big Boys
Bears aren’t so sure of this highly expensive strategy. Hedge-fund manager David Einhorn is bearish on Netflix stock because earnings estimates are coming down even as the stock continues to soar.
The thing is, if a stock is already trading at an insane forward premium, does it really matter if that premium goes up a bit more because some analyst marked down her forecast by pennies per share?
Netflix’s costs may be the least of the company’s worries. It’s the big picture that’s of most concern.
Remember that Netflix hardly has the streaming video industry all to itself. Among seemingly countless upstarts, it’s battling the behemoths of Amazon and Google.
Amazon said Monday that it signed up 3 million Amazon Prime members in the third week of December alone. Those Prime subscribers doubled their viewing hours of Prime Video year-over-year — thanks to pricey original content.
Meanwhile, Google is making a huge push with YouTube, which could easily come to dominate the market by some analyses. Barron’s says YouTube is already twice as valuable as NFLX because it has far more viewers and faster growth.
It also helps that Amazon and Alphabet do a lot more than create and distribute video. (On the other hand, Netflix doesn’t have to worry about ad spending.)
Mounting competition is a serious concern for Netflix, but it’s far too soon to wave a white flag on NFLX stock. We’re a long way from the day when streaming video becomes a zero-sum game.
Besides, if Netflix continues to produce hit content, it will win that battle anyway.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
