Netflix, Inc. (NFLX) Is a Buy if You Can Stomach the Volatility

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The post-election selloff in Netflix, Inc. (NASDAQ:NFLX) and other technology stocks looks to have run its course, and that means investors in NFLX can go back to focusing on what really matters: the fundamentals.

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Netflix appears to be a company in transition as it adapts to being somewhat more mature. That’s not a bad thing, but it could lead to even more volatility in what’s always been a fairly wild stock.

Just look at the action since earnings. Netflix popped 25% in late October after 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.

Overdone moves to the upside are typical for NFLX stock, so you knew shares had to cool off in short order. The unexpected part was how much it would slump on the surprise result of the general election.

Shares plunged more than 10% from their most recent high to their post-election low. But NFLX stock has now strung together three straight sessions of gains, so it looks like the selloff was enough to burn off any post-earnings euphoria or post-election anxiety.

But that hardly means smooth sailing from here. Notice that Netflix stock has a five-year beta of 1.8, according to data from S&P Capital IQ. That’s a volatile stock and the current push-pull of recent results vs. longer-term forecast ensures it will remain that way.

Can NFLX Maintain Its Growth Rate?

The most important part of NFLX’s better-than-expected earnings report was that 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.

In the background of the party over quarterly results were some analysts offering words of caution. The past has been great but the trend might be turning. 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.”

The market is struggling to price all this into NFLX stock. At 120 times forward earnings, Netflix looks wildly expensive. On the other hand, it has a compound annual growth forecast of about 75%, according to Thomson Reuters. That’s not a particularly crazy premium for that kind of growth rate in a bull market.

What all this means is that although the future for NFLX stock remains up and to the right, the days of steep selloffs are not behind it. That’s just the price investors have to pay for a large-cap stock with such outsized growth prospects.

The slightest hint of bad news acts like a tripwire to the downside. But it will always come back.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/11/netflix-inc-nflx-stock-volatility/.

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