What happens in Vegas, stays in Vegas. Unless, of course, what happens is the Consumer Electronics Show, which is in full force. As far as we can tell at this early juncture, the winner is Netflix (NFLX).
Netflix CEO Reed Hastings pumped things up with a keynote declaring his company has tripled the number of countries using its streaming service to over 190. Despite the overall market in the dumps, Netflix stock soared 9.3% on the news.
As should be no surprise, Hastings had some visionary statements, declaring that we are “witnessing the birth of a global TV network.”
That’s certainly exciting, but investors should approach with caution, especially considering Netflix stock’s roller coaster price action lately, which probably won’t end anytime soon.
Some Issues for Netflix Stock
Let’s face it, the process of gaining subscribers in many of the new countries for NFLX will likely take time and plenty of marketing resources. Even Hastings admitted this in his keynote: “Today’s launch is like having a baby: It’s a big deal, but the real work is the next 20 years.”
Besides, while countries like India and Russia may have large populations, they are also generally low income and have meager penetration rates of broadband. This is why Facebook’s (FB) Mark Zuckerberg has been putting lots of focus on his free Internet service for developing nations.
What’s more, Netflix is still only available in 17 languages.
Such things are to be expected, right? NFLX is still in the early innings after all.
Yet, there are certainly looming issues facing the company, issues that may materialize this year. Just look at a recent analyst report from Baird & Co., which mentions the threat of fast-rising competition, burdensome content costs, pressure on pricing and the steep valuation of NFLX stock. Interestingly enough, based on the firm’s recent survey of 3,000 U.S. consumers, user growth has stalled.
Granted, this may sound overly alarmist, but Netflix missed its own projections for the domestic market during its latest earnings report. Hastings blamed the recent changes in security for a change in debit and credit cards. Wedbush analyst Michael Pachter decried this as “the dumbest thing I’ve ever heard.”
A better excuse is likely the emergence of serious competition. Some of the rivals include biggies like Hulu, Amazon.com (AMZN), Alphabet’s (GOOG, GOOGL) YouTube, Comcast (CMCSA), 21st Century Fox (FOXA), CBS (CBS), Time Warner (TWX) and Sony (SNE) gunning for the market. Of course, there’s also lots of talk that Apple (AAPL) will make a play for the streaming market as well.
The cruel irony is that NFLX licenses content from many of its competitors, which means the potential for price squeezes.
Bottom Line on Netflix Stock
With Netflix stock up a sizzling 130% in 2015, there is certainly some anxiety. Might investors start to get concerned and take their gains?
This seems like a good bet if the momentum starts to trail off. And already, there are signs of this: During the latest quarter report, Netflix stock plunged 15%, followed by a similar response on a rumor that Time Warner would invest in Hulu. Within about a week, NFLX stock lost about 8% of its value.
Then there was the month-long decline of 17% that started in early December — on virtually no news!
In other words, there is lots of sensitivity with the current valuation on NFLX stock. Going into 2016, it seems inevitable that the company’s rivals will be ramping up their efforts, which will provide even more “headline” risk.
So in light of all this, it’s probably a good idea to not pull the trigger on NFLX stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All 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.
