Despite the Falling Price, Avoid Streaming Netflix Stock

Disney's pressure is only one of the problems for Netflix stock

By Will Healy, InvestorPlace Contributor

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The massive drop in Netflix (NASDAQ:NFLX) leaves many investors who missed the boat on Netflix stock wondering if and when they should buy. The decline began when the company missed revenue and subscriber growth numbers back in July. A better earnings report in October only stemmed the downward tide for a short time.

However, despite the massive drop, the stock maintains triple-digit valuations. Moreover, high debt levels and competition could take growth levels, and by extension, the price-to-earnings (PE) ratio further down.

Even at this lower price, buying Netflix stock has not become significantly less risky.

Disney Endangers Netflix’s Edge

NFLX stock has thrived on the strategic vision of its leadership. These decisions have made them lead the way in mailed DVDs, streaming, adding content, and global expansion over the years. With the low cost of their service, they more than decimated the pay TV and movie rental industries.

They also saw the need for content to stay competitive early and developed an impressive content library in a short amount of time. This kept them ahead of Amazon (NASDAQ:AMZN) and Prime Video as well as services such as HBO Now, now owned by AT&T (NYSE:T).

However, their lead on content will likely come to an end because of Disney (NYSE:DIS) and their upcoming Disney+ streaming service. Disney content served as one key component keeping Netflix ahead of its peers. However, with that content leaving Netflix, it will no longer hold market leadership.

This situation becomes especially dangerous for holders of Netflix stock. NFLX has lost nearly one-third of its value since logging its 52-week high of $423.21 per share in June.

However, the equity still trades at a price-to-earnings (PE) ratio of around 108. I’ve frequently panned NFLX stock for this valuation. Still, it trades on a “vision premium,” a valuation premium associated with companies offering visionary, cutting-edge advances.

With Disney offering the same service with a more highly-rated content library, Netflix may appear less “visionary.” Moreover, Disney has expressed a desire to undercut Netflix with regards to its monthly subscription fee.

Financial Dangers for Netflix Stock

Granted, streaming services remain cheap in comparison to the cost of cable. For that reason, I expect most people will subscribe to multiple services. However, Netflix has driven much of its profits on periodic price increases. Competition could inhibit Netflix from implementing fee increases as often.

This hurts, since price hikes will likely become necessary to maintain growth. Subscriber fees remain part of the reason analysts have forecasted massive growth in both the past and the future.

At today’s price, Netflix stock supports a forward PE of just above 68. While that PE ratio appears close to moving in line with the predicted 57.9% growth rate for 2019, Netflix stock may still fall for other reasons.

Debt levels stand at over $8.3 billion. This comes in quite high for a company who earned $1.077 billion in the first nine months of the year. Netflix will probably need to issue further debt to maintain its spending on content.

The Bottom Line on Netflix Stock

Despite the falling PE ratio, Netflix stock remains expensive and faces dangers in many areas. Disney+ will likely overtake Netflix from a content perspective the second it launches. Even if most customers subscribe to both services, it could put pressure on Netflix’s margins.

Moreover, the PE ratio of NFLX remains in the triple digits. While that will likely continue to fall so will the company’s growth rate. Furthermore, the dependence on debt could endanger the stability of the company’s business model if growth rates slow substantially.

Although I expect Netflix to survive, the current price levels of Netflix stock may become a different story. Considering the financial pitfalls and a looming competitive threat, I cannot recommend NFLX stock despite this discount.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/despite-price-avoid-netflix-stock/.

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