Netflix (NASDAQ:NFLX) has been hammered this month. Netflix stock has tumbled from $375.68 on July 1 to $303.30 as of this writing.
Subscriber numbers have peaked, with growth failing to meet expectations. With the old-line media companies such as Disney (NYSE:DIS), AT&T‘s (NYSE: T) WarnerMedia and Comcast‘s (NASDAQ: CMCSA) NBC Universal launching their own services in the next few years, Netflix stock could see additional pressure.
Taking all of this into account, is NFLX stock a buy? Read on to see whether there’s an opportunity in the dip, or if recent declines are a clear cut reason to sell/avoid.
Quarterly Results and Netflix Stock
Netflix released second-quarter 2019 earnings on July 17. Year-over-year quarterly sales growth continues to slow down. Second-quarter 2019 sales were up 26% from the prior year, compared to 40.3% YoY sales growth in the second quarter of 2018.
While the number of subscribers is up 21.9% from the second quarter of 2018, the addition of 2.7 million “global net paid adds” was far below forecasts of 5m additional subscribers this quarter.
Domestically, Netflix’s Q2 performance was an even bigger disappointment. The company lost 130,000 subscribers, with paid memberships stagnating at ~60 million. With increases in the monthly subscription rate, revenue was up ~10.8% from the prior quarter. But long term, the company cannot depend on subscription hikes to drive revenue growth.
Despite this stumble, NFLX expects to add an additional 6.2 million international subscribers, and 800,000 US subscribers, in the third quarter. Can NFLX continue to meet these expectations?
Unsinkable Netflix? Not So Fast
Netflix had the benefit of first-mover advantage. Before the rest of the media world saw value in streaming, NFLX was able to acquire content at bargain-basement rates.
But as Netflix won big, big media smartened up. They started raising licensing fees on their content. With the emergence of Hulu and Amazon‘s (NASDAQ:AMZN) streaming services, the media companies now had multiple suitors for their content.
Now with Disney launching Disney+, WarnerMedia launching HBO Max, and NBCUniversal launching its yet-to-be-named streaming service, Netflix is caught in a bind. The big media giants are no longer licensing content to Netflix, preferring to move streaming in-house. Without reruns of fan favorites such as Friends and The Office, will subscribers keep paying for Netflix?
With the company investing billions into original programming, Netflix believes it can beat Hollywood at its own game. But the company should wait before pulling out the champagne. Netflix original programming is not driving subscriber growth. The company talks a good game, but the lion’s share of viewing hours still come from licensed shows.
To quickly build up their content portfolio, NFLX could try to buy up available franchises. For example, they could buy MGM Holdings, and gain control of the James Bond franchise. But deals like that may be too little, too late. Big media is catching up fast, threatening the premium valuation of NFLX stock.
Valuation: Despite Dip, Netflix Stock Remains Overvalued
Despite the recent pullback, investors continue to give Netflix stock a high valuation. NFLX stock currently trades at a forward price-to-earnings (Forward P/E) of 94.6. Enterprise Value to EBITDA (EV/EBITDA), another relevant valuation metric, is 74 for the trailing twelve months (TTM). These valuations set high expectations, which could spell trouble if reality does not line up.
Here are the current valuation ratios for NFLX’s primary competitors:
Amazon: Forward P/E of 72.9, EV/EBITDA of 32.1
AT&T: Forward P/E of 12.3, EV/EBITDA of 7.5
Comcast: Forward P/E 15.3, EV/EBITDA of 10
Disney: Forward P/E of 20.3, EV/EBITDA of 18.5
Comparing NFLX stock to its publicly-traded peers is not apples-to-apples. But comparing Netflix stock to Disney stock is relevant; both companies are moving into each other’s businesses.
Disney is using the cash from its declining cable networks to fund streaming growth. Netflix is using the subscriber revenue to build up its content portfolio. Long-term, both companies may have similar components (intellectual property that supports a subscription-based content business).
Given the choice, which one would you rather own? The company that owns billion-dollar franchises, and wants to dominate streaming? Or the company that dominates streaming, but has to give up more of its revenue to acquire/develop billion-dollar franchises?
Avoid Netflix Stock
We may now have reached “peak Netflix”. With the company’s US subscriber growth stagnating, the company is dependent on international growth to sustain its valuation. With the media giants starting their own respective streaming services, Netflix will soon be deprived of the popular reruns it hates to admit subscribers want to watch.
NFLX will survive and thrive. But long-term, the company no longer has a leg-up on the competition. Over time, the valuation of Netflix stock will revert to levels closer to peers such as Disney. Investors looking for an opportunity in streaming growth should look elsewhere before considering NFLX stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
