Netflix, Inc. (NASDAQ:NFLX) has long been a favorite of momentum investors. But after NFLX stock soared more than 130% in 2015, shares have faded this year as traders have become more “risk off.
Click to Enlarge However, lately shares of the streaming video giant have been trending higher. NFLX stock is up about 20% from its February lows. Furthermore, Netflix stock has seen its 20-day moving average cross above its 50-day average in the past week or so, hinting that sentiment has shifted to the upside significantly.
Still, resistance is pretty difficult to breach around $103 or so, and if NFLX stock falters, it could be a long way down for this stock as momentum moves to the downside once more.
So what’s the score? Has Netflix run out of runway, or is the recent rollback in NFLX stock really just a buying opportunity before this entertainment icon moves higher?
Here’s a look at three pros and three cons about investing in Netflix stock now, so you can decide for yourself.
NFLX Stock Pros
Netflix Earnings Beat: In January, NFLX reported better than expected earnings of 7 cents per share on forecasts of just 2 cents. Shares jumped by double digits after hours on the beat, and investors were very encouraged by the bigger profitability for Netflix despite continued investments in the business.
International Growth: Another big plus from January was the continued growth of Netflix abroad. Specifically, NFLX reported 4.04 million more international subscribers in Q4, blowing away expectations for 3.51 million in international growth and up from a rate of 2.43 million in the year prior. With 27.4 million paid customers abroad and a rapid growth rate around 15% annually for this segment, Netflix is diversifying nicely between its international subscribers and its mature domestic streaming business that has 43.4 million subscribers.
Original Programming Power: Netflix originals from House of Cards to Orange is the New Black have loyal followings, and more recent titles like the Making a Murderer documentary series continue to connect with viewers and critics alike. This is not only good for the NFLX brand, but also good at keeping down content costs. Consider that the cost of revenue for its streaming business was 69.6% of total revenue in fiscal 2015, but 70.8% in the year prior. The lower cost of hit originals has helped contribute to that trend and boost profitability.
NFLX Stock Cons
Not Meeting Expectations: While Netflix did beat on earnings, revenue came in slightly below expectations. And let’s not forget that while NFLX stock posted a big beat in January, it has struggled to consistently top profit forecasts in the last several quarters with significant misses in both October and last April. Investors have thus far been able to take comfort in the details, but that could get increasingly difficult if forecasts are missed regularly.
Competition Heats Up: While Netflix has a clear first-mover advantage, that advantage counts for less as rivals including Hulu and Prime Instant Video from Amazon.com, Inc. (NASDAQ:AMZN) continue to gather customers. Consider a January report from Consumer Intelligence Research that estimated Prime customers are up 35% year-over-year to 54 million U.S. members in 2015. While streaming isn’t the sole draw, the fact that AMZN may have more customers than the domestic business of NFLX stock is certainly noteworthy.
Valuation: In a go-go market when investors are paying high multiples for momentum names, Netflix has done very well. But when investors get more “risk off” and start to question paying a premium for any and every tech name, things get much harder. With a forward Price-to-Earnings ratio of more than 90 and a price/sales of around 6, there’s not a lot of room for error here — and as the last two points show, there are plenty of real reasons to be bearish about NFLX stock.
If I have to pick sides, I would have to side with the bears simply based on the broader investing environment. Betting against Netflix in the long-term has always been a fool’s errand, but there have been brief periods of trouble in the past, and I think we are in the middle of one of those rough patches for NFLX stock in 2016.
If the dust settles, I’d consider adding Netflix. But for now, the bears seem to be right.
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 aforementioned securities.
