The bull/bear argument over Netflix, Inc. (NASDAQ:NFLX) has been a stalemate over the last five months. The NFLX stock price is back where it was in mid-July, despite continued strength in large-cap tech stocks.

That makes some sense. NFLX stock skyrocketed after blowout Q2 earnings in July, a report that at the time I argued was hugely impressive. Since then, however, the news has been more mixed. The market shrugged at a similarly strong Q3 report, and now potential upheaval in the content-creation and distribution businesses raises both risk and opportunity for Netflix.

Of late, I’ve found myself increasingly cautious on NFLX stock, particularly as it briefly rose above $200 this fall. That’s still the case heading into 2018. There’s simply a lot going on beyond Netflix’s control. Its operating model is evolving, perhaps more out of necessity than choice. Recent choppiness aside, this remains a stock that hasn’t had a significant pullback in almost two years.

That pullback likely will be coming at some point in 2018. Whether that pullback is worth buying will depend on how the company is positioned after what’s likely to be a movement-filled year in the media industry.

The NFLX Stock Price

By any measure, NFLX stock is dearly valued. The stock trades at 83x 2018 EPS estimates. It’s valued at roughly 8x revenue on an enterprise value basis. Cash flow is negative and sharply so.

That alone doesn’t mean NFLX stock should be a sell. It is a growth stock, after all. But the valuation here has to be a concern in light of valuations of other major players in the media space.

For one, Netflix’s valuation ($90 billion) is similar to the price AT&T Inc. (NYSE:T) is paying for Time Warner Inc (NYSE:TWX). Time Warner includes HBO — whose combination of licensed and owned content is similar to Netflix’s current content model — movie studios, Turner cable networks, and other assets.

It’s certainly fair to ask whether Netflix should be valued twice as much as HBO (estimated by HBO’s sub-50% contribution to TWX’s overall profits). Netflix does have more than twice as many subscribers, but roughly half of those are lower-revenue and lower-profit international users.

Netflix also is valued at about half the total value of Walt Disney Co (NYSE:DIS), half of whose profits come from its Media Networks business. So it’s worth asking whether Netflix should be valued more highly than ESPN, ABC, and Disney’s other media assets.

In both cases, I’d say the comparisons suggest the NFLX stock price is a bit too low. I’d rather own Netflix than HBO. I’d certainly rather own Netflix than ESPN and ABC, given that Disney’s cable network profits declined in its fiscal 2017.

But at the least both show that Netflix is being valued as if it is a media giant and will be forever more. And so the question in 2018 will be: What might happen if that no longer appears to be the case?

Competition on the Way

Last month, I discussed the impact of the then-speculated, now-official deal between Disney and Twenty-First Century Fox Inc (NASDAQ:FOX,NASDAQ:FOXA). The NFLX stock price didn’t move much on that news, nor when the $52-billion deal was officially announced last week.

But as James Brumley argued on this site, NFLX shareholders better take that deal seriously. As Brumley pointed out, the Fox deal doesn’t only add content to Disney’s own streaming service. It also gives Disney 60% control of Hulu and, finally, a majority voice leading that Netflix rival.

Suddenly, Netflix’s competitive situation looks very different. Based on U.S. streaming hours, the company had a healthy lead on Alphabet Inc (NASDAQ:GOOGL) unit YouTube — a very different offering — with Hulu third and Amazon.com, Inc. (NASDAQ:AMZN) a reasonably distant fourth.

Now, Disney has a well-rounded offering coming to market, and Hulu should be a stronger rival. Both will be dying to take share from Netflix. And yet, as noted, valuation here suggests a scenario where Netflix already has won. That no longer is guaranteed to be the case.

Looking to 2018 for Netflix

All things equal, I still expect Netflix to come out on top. In the U.S., its market share is enormous, its content is dominant, and there’s more than enough room for consumers (myself included) to subscribe to more than one streaming player. Internationally, I doubt anyone will catch Netflix.

But it may be a tougher and choppier road to that point. It’s not hard to imagine the NFLX stock price stumbling if early adoption of Disney’s launch next year looks stronger than expected. Netflix may not be able to take pricing as easily as expected. Its content costs, already soaring, may have to rise further to maintain its library as the largest and deepest among its rivals.

Simply put, there’s just more that can go wrong here, even excluding a possible broad market pullback. With valuation so high, the sentiment toward NFLX stock is going to drive its trading. And it’s not hard to imagine that sentiment weakening, at least at some point over the next 12 months.

As of this writing, Vince Martin has no positions in any securities mentioned.