Netflix, Inc. (NASDAQ:NFLX) stock has cooled off a bit since setting an all-time high a couple of weeks ago, which is to be expected after such a hot run. The question now is how much more cooling does NFLX stock need?
NFLX is still having a respectable 2016. Shares are up more than 9%. That beats the S&P 500 by about 6 percentage points, albeit with a great deal more volatility.
The concern is that NFLX has traded melodramatically for years. It soars and plummets routinely.
It started the year with a 30% drop from a January high to a February low. From April to May, it fell as much as 20% from a recent peak. The upside moves have been equally overheated. Lather, rinse, repeat.
That makes it hard to get behind NFLX stock when it’s flying like it is now. As strong as the bull case may be on Netflix, it never seems to hold a trend. In other words, it’s easy to inadvertently buy high. The sky-high forward price-to-earnings multiple of 130 acts like a tripwire for selling whenever the narrative or numbers come up short.
Click to Enlarge To complicate matters, after a golden cross and a spike on blowout earnings, Netflix stock is now overbought. Recent downward trading feels like just the beginning of something longer and steeper.
The proximate cause for Netflix’s 25% pop since mid-October was the most recent earnings report. It was a quarter that absolutely demolished Wall Street expectations.
Earnings came to 12 cents a share when analysts were looking for 6 cents. Revenue grew to $2.29 billion vs. a Street estimate for $2.28 billion.
Not Everything Is Rosy for NFLX Stock
Most importantly, the company overdelivered on subscriber growth. Netflix gained a net of 370,000 memberships in the U.S. and 3.2 million internationally. The total of 3.57 million topped the company’s expectations of 2.3 million by a wide, wide margin.
And then, for dessert, Netflix raised its forecast.
It’s not that NFLX stock doesn’t deserve a lift for news like that. It’s just that this rally looks overdone. In the background of the party over quarterly results were some analysts offering words of caution. FBR Capital Markets analyst Barton Crockett went on CNBC to say:
“They’re adding fewer subscribers this year than they did last year. … You know, that’s why I think you’ve got to be careful with this stock. Yeah, it’s a great business, yeah they’ve had a great trajectory, but it’s slowing. And a growth stock like this that isn’t making much money, you know, is a volatile beast and can be a dangerous company when it’s starting to slow and transition from a growth story to something more mature.”
Furthermore, NFLX continues to struggle on the home front. Here’s something from a note by Bernstein Research:
“We point to the continued YoY decline in domestic net adds, despite a significant increase in marketing spend, the increase in churn associated with the price increase, the growing competition, which we believe will intensify, and the shrinking addressable market in the US, where the number of fixed broadband connections is likely declining.”
There’s nothing necessarily wrong with being long and strong on Netflix stock. Sure, it’s in competition with Amazon.com, Inc. (NASDAQ:AMZN) and a host of other competitors, but it has a lead. Rather, it’s all about what price you pay to get in. All this recent heat suggests that new money should wait for a better entry point.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
