Netflix, Inc. Stock Is on Fire: Here Are 4 Possible Fuels

Netflix stock - Netflix, Inc. Stock Is on Fire: Here Are 4 Possible Fuels

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Netflix, Inc. (NASDAQ:NFLX) is on an amazing run. Netflix stock is already up 70% year-to-date. And we’re only in the first week of March!

Out of the entire S&P 500, NFLX stock is far and away the biggest gain. Insurer XL Group Ltd. (NYSE:XL) is getting acquired and is up 58% for the year so far. No other stock in the S&P 500 has advanced more than 50% so far in 2018.

So what explains Netflix stock’s jaw-dropping performance? Here are several theories.

Content Is Hot

In November, Walt Disney Co (NYSE:DIS) announced plans to buy a large chunk of the operations of Twenty-First Century Fox Inc (NASDAQ:FOX). This set off a great wave of speculation about what great content remains available for future acquirers. For example, cable TV powerhouse Viacom, Inc. (NASDAQ:VIA) is up close to 40% since Disney announced its deal for Fox.

And if you’re thinking content, it’s hard to get bigger than Netflix nowadays. As InvestorPlace’s James Brumley recently noted, Netflix is planning on spending $8 billion to create an astounding 700 television shows. Surely only a minor fraction of these will be substantial hits. Even then, Netflix will own a gigantic share of popular programming if even 10% of that turns out to be meaningfully successful.

For comparison’s sake, Brumley noted that networks such as CBS and ABC tend to keep their content budgets at less than 50% of what Netflix is planning on spending this year. Netflix is a relative newcomer to original content, but it’s taken little time getting to the top of the heap. If you want to buy a burgeoning content goldmine, Netflix stock is a top choice.

A Short Squeeze for Netflix Stock

When stocks make crazy moves — 70% in two months and more than 10% last week alone — short squeezes are a natural potential cause.

Bears haven’t taken a drastically large position in Netflix stock on a relative basis.

Currently, short sellers have sold 5% of NFLX short. On a relative basis, you can find plenty of more hated stocks. However, on an absolute basis, we’re talking about a stock that was worth under $100 billion in market cap just weeks ago. That’s up to more than $140 billion today.

Given the $50 billion rise in market cap this year, with shorts at 5% of the float, the bearish position has lost close to $2.5 billion so far this year. And counting. It’s hard to stick to your guns as a pessimist when you’re taking that kind of heat, and I expect many Netflix stock valuation bears are throwing in the towel — and helping to drive the price higher as a result.

Netflix Just Has the Best Content and the Best Platform

A more durable theory for the run in Netflix stock is that it is being permanently revalued higher. It’s long been no secret that Netflix by far has the best platform for streaming. Netflix seemed doomed to never make much money, however, a permanent prisoner to escalating content costs.

This is the problem that threatens to torpedo the Spotify IPO, since Spotify doesn’t own the music it streams. Record labels have been sucking up all the potential profits out of Spotify’s industry-leading platform.

This may not be the case for Netflix anymore thanks to the bet-the-company push for original content discussed earlier. The company only brings in $16 billion a year in revenue and is spending fully half that on making new programs and movies.

But man, if it works Netflix would have a better content library than all the broadcast networks, film houses, and cable channels.

Realistically, only Disney can compete with Netflix on a streaming service basis. And even there, Netflix has a big leg up in foreign markets. In my country (Colombia), Netflix has already produced or greenlit three Colombia-specific television programs. That sort of local leg-up, multiplied by similar efforts in dozens of markets, creates a massive moat versus U.S.-centric content producers.

Assuming Netflix maintains the best content pool going forward, married with the best platform, its valuation can still run a lot higher. Over time, Netflix can cut back its reliance on expensive outside content and still keep its subscribers. And as it develops more of its own hit evergreen programming, it will need to invest less in new shows.

All in all, if Netflix can keep the quality of shows high (a big if), Netflix stock has plenty more room to go.

Is Netflix a Buyout Target?

There’s also increasing trader chatter that a buyout offer is coming for Netflix stock. Look at the huge volume in Netflix stock options and the near exponential surge in the stock price as of late. It has the look of people who’ve heard rumors and want to make sure that they don’t miss out.

Apple Inc (NASDAQ:AAPL) has long been a potential suitor for Netflix. It’s not hard to see why. There’d be plenty of synergies and opportunities for cross-marketing. In truth though, it’s not hard to make a case for any of the big tech companies buying Netflix while it is still affordable.

At a $140 billion market cap, the big four tech titans could all still make a bid for Netflix without significantly impairing their balance sheets. But if NFLX stock runs up much more, it will get too expensive for even the big tech titans to acquire. Keep in mind that Netflix earns virtually no profits now, and thus would be massively dilutive for a company like Apple to buy. It’d ding the suitors PE ratio pretty badly. So if a buyout is coming, the offer should come soon before the price gets up too high.

While Netflix would be a huge acquisition for any potential buyer, now is the time to strike.

At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media,

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