It’s Tough To Bet Against Netflix, But Tread Carefully

Subscriber growth could continue to climb, but Netflix carries a rich valuation

It’s no surprise that Netflix (NASDAQ:NFLX) stock is a top performer so far this year. The novel coronavirus has been a tailwind for the streaming giant. With millions stuck at home, U.S. subscriber numbers have skyrocketed as of late.

NFLX Stock: It's Tough To Bet Against Netflix, But Tread Carefully
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However, can this recent success continue after things return to normal?

That’s debatable. On one hand, the NFLX has a key factor on its side. As our own Louis Navellier recently wrote, it has more than enough original content through 2020. This should help retain current subscribers, and potentially add more to the service.

On the other hand, Netflix is taking on large amounts of debt to finance this production slate. Right now, it is operating with negative cash flow, betting that continued growth will turn the company into a cash cow down the road.

However, with competition on the horizon, it’s possible Netflix bites off more than it can chew.

As it continues to crush it in the entertainment realm, it’s hard to bet against NFLX stock. Let’s dive in and see what’s the verdict on shares today.

Why NFLX Stock Could Head Higher

There’s no one embracing that mantra “content is king” better than Netflix right now. Projected to spend as much as $17 billion this year on original films and TV shows, Netflix is putting it all on the line to maintain its dominant position in streaming.

This benefits NFLX in two ways. First, by having “something for everybody,” the streaming service offers significant value relative to cable. As Americans cut the cord, streaming services like this are a low-cost substitute.

Secondly, it keeps the existing subscriber base happy. Households have many streaming options besides Netflix. Disney’s (NYSE:DIS) Disney+ and Hulu services stream many popular films and TV shows. AT&T’s (NYSE:T) WarnerMedia and Comcast’s (NASDAQ:CMCSA) NBC Universal have set up streaming services of their own. In other words, NFLX is no longer the only game in town.

However, Netflix’s first-mover advantage in content investment could reduce this risk. Also, given the low subscription cost, households may opt for multiple services instead of choosing one over the other.

There are some key risks investors should keep in mind before diving into NFLX stock. Things look rosy right now. But there are valid reasons for concern as shares trade near all-time highs.

Shares are Priced for Perfection

The coronavirus has been a windfall for NFLX’s U.S. subscriber numbers. Last fall, it looked like its domestic subscriber base had peaked.

But stay-at-home orders have meant a sudden ramp-up in subscribers. This quick acceleration could slow down once stay-at-home orders come to an end. Granted, this doesn’t mean people who got Netflix due to social distancing are going to cut the service post-pandemic.

However, it could signal that Netflix’s U.S. growth is over. Like what we saw last year, all future growth will come from overseas. Given its first-mover advantage relative to other streaming giants, Netflix’s international growth could remain in motion.

Loop Capital’s Alan Gould seems to agree. The analyst estimates Netflix could add 30 million subscribers a year for the next five years. He sees NFLX being cash flow positive in 2022, and possibly debt-free in 2025.

There are valid reasons to be concerned over streaming competition. In other to remain at the top, Netflix may have to invest even more into new content. This content arms race may mean the company stays cash flow negative for longer than anticipated.

Right now, NFLX stock trades for a forward price-earnings ratio of 69.9. That high valuation is the result of investors anticipating continued subscriber growth and an eventual ramp-up in profitability. But, if that doesn’t happen on schedule, expect valuation to contract.

By buying today, you are making a big bet that the salad days will continue. But, as social distancing comes to an end, expect more challenges to NFLX’s long-term growth.

Consider Netflix Stock a Cautious ‘Buy’

There are valid reasons on the bull and bear side regarding this stock. From those who believe shares could head higher, trends are definitely Netflix’s friend. As cord-cutting continues, and NFLX makes aggressive moves into overseas markets, subscriber growth may continue.

As “sticky” recurring revenue increases, profits could skyrocket, and Netflix may soon become cash flow positive. On the other hand, with new competition on the horizon, and a rich valuation, shares could disappoint, making it risky to buy at today’s all-time highs.

Weighing pros and cons, consider NFLX stock a cautious buy. Don’t expect epic gains like those seen as of late. But, with trends on its side, shares could continue to perform well in 2020.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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