3 Nagging Risks Netflix, Inc. Stock Investors Cannot Ignore

Advertisement

NFLX stock - 3 Nagging Risks Netflix, Inc. Stock Investors Cannot Ignore

Source: Shutterstock

Netflix, Inc. (NASDAQ:NFLX) is certainly scary for the traditional media industry. The company is the global power of the streaming market, which, along with NFLX stock, is likely to see long-term growth.

During the latest quarter, the number of paid subscribers jumped by 5.3 million to 104 million and revenues rose by 30% to $2.99 billion.

In light of this, it should be no surprise that NFLX stock has been one of this year’s hottest performers. So far, the return has been 56%.

By comparison, old-line operators like Viacom, Inc. (NASDAQ:VIAB) and Discovery Communications Inc. (NASDAQ:DISCA) are off by double-digits.

Yes, I have been a bull on NFLX stock for some time – and I haven’t changed this position. Yet I still think it is important to consider the risks. The tech world can be extremely volatile, as leaders can quickly crumble.

OK then, what are some of the major issues for the NFLX stock price to consider? Well, let’s take a look at three:

NFLX Stock Risk #1: Intense Competition

Over the years, NFLX has proven to be adept at fighting rivals. A prime example of this is how the company dealt with Blockbuster Video, which eventually went bust.

But the streaming market is different. NFLX must fight against many players that have tremendous resources, like Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL).

In the meantime, there are various companies that are launching their own offerings, such as Apple Inc. (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB) and Walt Disney Co (NYSE:DIS).

Oh, and international markets are also heating up, especially in Asia. Mega tech firms like Alibaba Group Holding Ltd (NYSE:BABA) and Tencent Holdings Ltd (OTCMKTS:TCEHY) are making significant investments in streaming. These companies also have the advantage of massive user bases.

NFLX Stock Risk #2: Content

A key part of the success of NFLX has been the focus on creating original content. The company has been able to spin-up successful programming like “Stranger Things” and “The Crown.”

But then again, the entertainment industry is notorious for being difficult. After all, consumer tastes are fickle. Even some of the greatest studios have suffered prolonged dry-spells.

Regarding NFLX, the company is actually making big changes with its approach to content. That is, it is moving away from licensing because of the rapidly escalating costs.

However, this also means that NFLX will need to make upfront payments. In other words, if a movie or series fails, the ultimate financial risks could be significant.

Something else: NFLX plans to produce a whopping 80 original films for 2018. To put this into perspective, a typical studio develops anywhere from 15 to 25 or so.

NFLX Stock Risk #3: Valuation

The NFLX stock price is certainly trading at lofty levels, with the price-to-earnings ratio at about 193X. The company is also likely to continue to post negative free cash flows (the estimate for the full year is $2 billion to $2.5 billion). Because of this, NFLX will have to keep tapping the debt markets.

Granted, a high valuation is not necessarily a problem. As long as NFLX can continue its growth ramp, the multiple can remain at a premium. We’ve seen this with other red-hot companies like AMZN and Tesla Inc (NASDAQ:TSLA).

But hey, NFLX stock has still seen quite a bit of volatility over the years. And this is likely to not go away since the company is in the midst of major strategy changes.

And finally, with a market cap of $83 billion, a buyout does seem remote as well. If anything, the potential buyers are already building their own streaming platforms and have the resources to create their own content.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/nflx-stock-investors-ignore/.

©2024 InvestorPlace Media, LLC