Netflix (NFLX) stock set a new all-time high Monday in a torrid year for shares, but NFLX may have peaked — and then some — on concerns over costs for programming and complications in going global.
Netflix stock is a high-priced momentum play and is especially sensitive to anything that mars the bull case. If past is prologue, the latest setback in NFLX won’t amount to much. Indeed, shares were positive in Tuesday trading.
True, it’s hard to see NFLX stock having yet another year of stupendous gains. Sure, it could happen, but when a stock rises 160% in a calendar year, well … that’s hard to top. Netflix stock would have to go from $127 a share to about $330 a share. Besides, NFLX stock tends to follow huge years with pause years.
That said, the most recent freak out probably doesn’t break the uptrend — and NFLX hardly has to double and then some to prove its worthiness as a buy. Sentiment is fickle and as we’ve seen with Netflix stock before, the market turns on it periodically.
The latest turmoil was sparked by comments made Monday by its chief content officer at an investor conference. The big headline was that CMO Ted Sarandos said NFLX is struggling with its plans to go fully global.
Securing global rights to TV shows and movies is new, and studios aren’t set up to grant licenses on that scale, if large part because of internal politics. As Sarandos said:
“It has not been an easy road … We’re embarking on something that’s fairly new in terms of — in the media space — global licensing and programming … and now we are a global buyer, buying global rights for shows and movies. And there’s some resistance to it, but mostly from the regional sellers and people who are in charge of regional selling, who don’t want their job marginalized.”
NFLX Anxiety Not Likely to Last Long
At the same time, investors are worried about a sharp rise in costs. After all, NFLX plans to nearly double its programming to 31 original shows next year. It also has 10 feature films on its slate, as well as scores of other products.
Netflix famously doesn’t disclose how its shows are faring with viewers and that makes it hard to guess whether the costs are worth it.
Another concern is that Netflix is vulnerable to pushback from TV networks over licenses to their shows. Studios need to balance licensing content to Netflix with their cable and broadcasting licenses. The latter, of course, in under pressure as cable subscribers increasingly cut their cords.
The thing about Netflix is that such obstacles never last for long. Sure, the company could be overreaching in its quest for global dominance. So could Amazon (AMZN). But in both cases, investors ultimately believe in these outsized ambitions, and sentiment follows.
True, with a forward price-earnings ratio of 486, investors do look insanely bullish, but valuation only tends to catch up with you over the longer term.
If NFLX stock cools off in the days, weeks or months ahead, that’s a reason to buy, not sell. At a minimum, if any stock looks able to beat the market next year, it’s Netflix.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned earnings.
