It’s time to make a confession — Netflix, Inc. (NASDAQ:NFLX) is giving me a full-on migraine. It’s not that I hate this company. NFLX stock was once trading below a buck at the turn of the century. Today, it’s well above three digits. You can’t argue with performance, and performance like that merits special consideration, even if it did occur in the past. Yet there’s a lot of people that have a negative outlook on Netflix stock.
No, it’s not just my imagination. For starters, in the second half of this year, there have been five analyst adjustments. Four of them have been downgrades, which have come from big names like UBS and Jefferies.
For November, seven analysts have ranked Netflix stock as “underperform” or worse, while 12 recommend a “hold.” As an average, NFLX is somewhere in between bullishness and neutrality.
That’s hardly a ringing endorsement for what was once an unequivocal favorite in the markets. Either NFLX stock has truly lost its edge, or the bearishness is exaggerated. Let’s take a look under the hood, beginning with the critics.
Strong Headwinds Pressure NFLX Stock
One of the most obvious points of concern is that Netflix stock is overvalued. Against trailing earnings, shares trade at a multiple over 300. That is worse than virtually every other player in the global pay television industry. Against forward guidance, NFLX stock is trading at 130-times earnings — again, another dubious statistic. In fact, against almost any metric that involves “price” as part of its calculation, Netflix is either the absolute worst, or close enough.
That situation will seemingly dig itself deeper into a hole before it gets out, if it gets out at all. Net income trends have taken a massive hit in recent quarters. As an example, over the last six quarters, income growth averages a loss of 1%. It’s a far cry from what NFLX has been able to achieve in years past. It also points to the fact that the company has been able to expand its domestic and international footprint, but at substantial cost. Eventually, Netflix stock buyers may tire of the onerous premiums.
Then there’s that ugly little matter of net neutrality. In a nutshell, net neutrality is the argument that all internet traffic should be treated the same. While it has a progressive sounding name, the concept has significant opposition from those who view it as rampant regulation. Among those is Comcast Corporation (NASDAQ:CMCSA), which could potentially create avenues by which the channels it owns receive priority traffic. That of course would conflict with NFLX.
But as InvestorPlace Feature Writer James Brumley notes, “Two of Donald Trump’s key appointments are in favor of giving internet service providers the right to be biased in the digital content they deliver.” Because Trump essentially will have full control of the government, it could be a long four years for Netflix stock.
The Bull Case for Netflix Stock
Simply put, there’s no shortage of bearish arguments, but it’s not just the scale of pessimism. Admittedly, a majority of the critics have valid points. Another circumstance that tips in their favor is the record average prices seen in NFLX stock. Needless to say, a collapse here would be devastating.
However, I’m not sure that it will. The company has more than 81 million subscribers. To put that into perspective, that’s roughly a quarter of active subscribers to Twitter Inc (NYSE:TWTR). Most people will surely agree that this is an impressive haul. Netflix is a pay-for-play company; Twitter is not. In its fourth year, NFLX stock jumped from an average share price of 85 cents to $2.60. TWTR, on other hand, is barely holding it together.
The undesirable news about Netflix stock tends to detract us from just how powerful this company is. According to Statistic Brain, 30% of domestic internet traffic during peak hours is from NFLX users. Furthermore, 35% of all disc-rental revenue is a result of the Netflix Snail-Mail service. These are paradigm-shifting trends that have taken America by storm. It wouldn’t be too much of a stretch to assume the same will eventually happen in other countries.
What’s scary is that Netflix has more room for improvement in key sectors. One of those is in mobile. Only 6% of its multi-million strong consumer base use the service on their cell phones. By showing some attention towards mobile services, the company could hook those that fell through the cracks initially. Indeed, with half of its viewers using video game consoles to watch live streaming, NFLX stock has an enviable number of business opportunities to choose from.
The Final Word on NFLX Stock
I mentioned earlier that performance is not debatable. This is all the more relevant when you’re talking about Netflix stock. For its lifetime, the company’s annual returns average 76%.
It’s an impressive beat, to be sure. Amazon’s lifetime annual returns average nearly 88%, which smokes the competition. However, returns have slowed to 34% in the current decade. NFLX stock, on the other hand, is actually performing better since 2010 with an 89% average.
So the common misconception that Netflix stock has slowed down recently isn’t entirely accurate. From a broader view, shares are actually speeding up!
Certainly, I can see the hesitation that people have towards NFLX stock. As any company dominates their industry, the fear of declining returns is only natural. Furthermore, there has to be a compelling reason to buy a company at its all-time highs. But to go against Netflix stock is itself a major risk. There’s a lot to love here, and there may be plenty of noise left to make.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.