After another huge start to 2019 for Netflix (NASDAQ:NFLX) stock, the wind came out of the Netflix sails following its Q2 earnings report. A huge subscriber miss once again has investors questioning the long-term growth outlook for Netflix. Analysts and investors are also now taking a closer look at the steep valuation of NFLX stock.
Netflix has always been a high-risk, high-reward stock. But even for Netflix, the stock is facing a tremendous amount of risks over the next year or so. Here are three reasons investors should consider going to the sidelines on Netflix for a little while.
Netflix Is Still Inconsistent
The Q2 numbers once again demonstrated just how unpredictable Netflix can be on a quarter-by-quarter basis. Netflix didn’t just miss consensus subscriber additions estimates. It was a complete whiff. NFLX grew its subscriber base by 2.7 million, well below the 5 million Wall Street was expecting. In fact, it was a 46% miss.
Netflix has certainly matured as a company over the past decade. But the inconsistency of its performance still frustrates analysts and investors.
In July 2018, Netflix missed U.S. subscriber growth expectations by 43%. In July 2016, Netflix missed its subscriber growth target by 32%.
To its credit, Netflix has historically limited its big disappointments to one quarter at a time, bouncing back with impressive numbers the following quarter. But it’s difficult to own a stock that is only ever one quarter away from a huge miss out of nowhere.
NFLX Competition Is Getting Real
The bear case against Netflix stock for years has been that there are bigger, badder competitors waiting in the wings. But challenges from Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Hulu haven’t made much of a dent in Netflix’s business. Now that Disney (NYSE:DIS) is planning to launch its Disney+ streaming service in November, it’s understandable for NFLX stock investors to dismiss concerns.
Netflix has proven immune to competition up to this point. But it also hasn’t faced this type of competition.
Disney+ will cost $6.99 per month, much less than Netflix’s standard plan at $12.99. In fact, Disney has said it will bundle Disney+, Hulu and ESPN+ all for $12.99. Disney is offering a family-friendly service with the entire Disney library for nearly half price compared to Netflix. Families with children must love that offer. And the idea that mom and dad can lump in Hulu and ESPN+ for the same price as Netflix is a compelling offer.
NFLX Stock Is Expensive
At this point, NFLX stock investors are certainly tired of hearing the valuation metrics. However, that doesn’t make them any less relevant.
NFLX stock has a forward PE of 54.2. It has a PEG ratio of 1.97. It has a price-to-sales ratio of 7.5. It’s long-term debt-to-equity ratio is 2. Netflix burned through $1.66 billion in cash in 2016, $2.04 billion in 2017 and $2.68 billion in 2018. It consumed another $1.05 billion in cash in the first half of 2019.
Bank of America analyst Nat Schindler recently hosted an investor bull-bear debate among investors. After both sides presented their arguments, Schindler summed up his key takeaway.
“The line we think that best summed up the opinions of the room, however, was from a thoughtful investor who said: ‘With margins improving we should see EPS growing at 50% y/y for a while – if that is the case, there are better shorts out there,’” Schindler said.
I agree with that assessment. “There are better shorts out there,” is not necessarily a ringing endorsement of NFLX stock. I would add that there are also better longs out there. Given all the uncertainty surrounding the company in the near-term, NFLX stock buyers are taking a major leap of faith.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
