For many aggressive investors, Netflix, Inc. (NASDAQ:NFLX) is like the old fisherman’s story, about the one that got away.
Like a rare painting, Netflix stock has always seemed just out of reach, just a little too expensive to justify. What the bulls knew, and what the rest missed, was that Netflix was building the world’s first global, personalized entertainment system, and that riding the cloud and broadband’s future would make such a thing possible.
The Mar. 27 tech collapse caused Netflix shares to give up nearly one month of gains. They’re still up around 50% so far this year, bringing the market cap to $130 billion.
Is it time to buy Netflix stock, or should we let this fish swim away?
The Bull Case
The bull case starts with a clear idea of what Netflix is becoming: the first, and possibly last, global movie studio.
Steven Spielberg’s whinging aside, Netflix is becoming the screen to compete for, as cable was, as TV was, as Spielberg’s beloved movie theaters were a century ago. It’s where people are spending more and more of their time.
Getting on that screen, however, isn’t about budgets or publicity or even big directors. It’s about stories. It’s about winning on Netflix’ algorithms (the same kind of algorithms that gave us the Facebook, Inc. (NASDAQ:FB) scandal).
If you watch a Spielberg picture and like it, you’ll be offered others. Everyone gets to go down their own rabbit hole, creating their own network of preferences, one that is always narrowing and targeting just what they really like and hitting them with that dopamine again and again and again.
It’s not a schedule like CBS Corporation (NYSE:CBS). It’s not a collection of shows like HBO from Time Warner Inc (NYSE:TWX). Netflix is defined by its users. My Netflix may look nothing like yours. And this is true on a global basis.
Most of Netflix’ rise in the last few years has been fueled by international growth, as Asia and Europe get the bandwidth needed to use the service. Netflix now has 5 million more paid members outside the U.S. than inside it, about 110 million overall, and the runway for international growth continues to expand.
The Bear Case
The bear case is that the stock is very expensive.
Even with its latest drop, you’re paying 240 times earnings for Netflix, and 12 times its 2017 revenues of $11.7 billion. The 32% top-line growth is impressive, especially at this scale. And the near tripling of net income, to $559 million from $187 million the previous year, is great.
But even if profits hit $2 billion in 2018 (which they won’t), you’re paying 65 times earnings at the current price.
Then there’s the posse, competitors like the Walt Disney Co (NYSE:DIS), Comcast Corporation (NASDAQ:CMCSA) and, especially, AT&T Inc. (NYSE:T), assuming it gets Time Warner’s HBO into the stable.
With HBO’s “tent pole” franchises, huge budgets, and (at least in the U.S.) control over the last mile, this could let AT&T give away their own programming, cut into the time used for Netflix, and eventually replace it.
Personally, I don’t believe it. They don’t have the algorithm, and they don’t understand the demand it creates for greater and greater quantities of specific types of programs. Netflix doesn’t order shows based on a director’s reputation. They line up producers whose stuff users adore.
Bottom Line on Netflix Stock
Aggressive investors can easily pull the trigger on Netflix stock, despite its recent decline.
The only thing that can kill Netflix’ momentum is a global recession.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in T.
