After the Fall: Buy or Sell Netflix Stock?

We annoyed our wife the other night. It’s not something we were trying to do. But it’s also not the first time we’ve annoyed her in this way.

We were just sitting on the couch looking for something to watch. As usual the stuff on the normal channels wasn’t all that interesting.

There were a couple of potential movies. But our wife made a good point, ‘I don’t enjoy watching movies after coming in halfway through’. Valid.

In situations like this we turn to our streaming friends at Amazon Prime and Netflix.

Well, okay that’s a little white lie. We almost never go to Amazon Prime. And we’ll tell you exactly why in a moment.

But this night, like most, we went straight to the Netflix app on the TV. And therein lies the beginning of our annoying behaviour…

Choice is the best until it’s the worst

We started scrolling through the ‘New Releases’ section on the Netflix screen.

Scrolling, scrolling…scrolling…

Nothing really there of interest. Then we moved down to the ‘Trending Now’ section.

Scrolling, scrolling…scrolling…

Not much there either. By the time we made it down to, ‘Critically-acclaimed Binge-worthy TV Dramas’ our wife had enough.

‘Just pick something please!’

Again, she had a more than valid point. When in doubt we typically resort to ‘British Comedies’. The only problem is we’ve now made it through most of the British Comedies section.

‘Not worthy of watching again’, ‘Saw the first two episodes, not that funny’, ‘too black comedy’. The result…scrolling, scrolling…scrolling.

We don’t know exactly how long this went on. But by this stage our wife had simply decided to pack it in and go to bed. Again, a valid point.

The Netflix menu is really something to behold. It’s immense. It has categories you never even realised existed. There are programmes and movies on there you will thoroughly enjoy.

If you can find them.

The great thing about Netflix is the ability to stream virtually anything you want anytime you want.

And the worst thing about Netflix is the ability to stream virtually anything you want anytime you want.

We’re not sure anything in the history of anything has a positive that’s equally a negative. At least not when it comes to revolutionary tech like Netflix.

Choice like this is wonderful. Until it becomes virtually impossible to actually watch anything because there’s always maybe something else better just a few clicks away.

This problem we’re confident is not ours alone to bear. And really, it’s not a huge problem. In fact it’s really only a problem because of the ace Netflix has up its sleeve that others like it don’t have…


Eye watering multiples

As we said before, Netflix is our ‘go to’ app for streaming. We have access to Amazon Prime. But there’s a problem with Amazon Prime.

Its content sucks.

Amazon has some okay old movies on it. But most of the good ones you still have to pay for or rent. That’s not what you want in your streaming service. And the content Amazon does have in ‘Prime’ frankly just isn’t very good.

This is surprising considering the size of Amazon.

However, we know that Netflix has been a big spender on content. And this year Netflix has an US$8 billion original content budget.

Not even Amazon can match that. Amazon will spend roughly US$5 billion on content this year. Just a lazy US$5 billion…but pennies compared to Netflix.

At that pace of spending there might not be any content left on earth for either of them to buy.

However, while these amazingly large content budgets are huge, it doesn’t seem to have been kind to Netflix’s share price recently. 

Netflix’s growth is astounding. They have 125 million users now worldwide. Okay it’s not quite Facebook-league in the billions. But let’s not forget Netflix doesn’t have a free service. You want it, you pay for it.

That means Netflix does make money. In fact they even make a profit. A big one at that. For the full year ending 31 December 2017, Netflix made over US$550 million in net profit.

However, the stock is now trading at US$375. That’s a price to earnings ratio of more than 251-times. It’s eye watering.

The reason it’s so eye watering is that the market is pricing in future growth. Based on that multiple, it’s a heck of a lot of future growth.

And this is where things get sticky. Netflix’s user growth just slowed down. And when they let the market know the price fell off a cliff. 14% down in after-market trading earlier this week.

This brings up the question, what does Netflix still have up its sleeve?

Scrolling or streaming?

Netflix has to contend with the fact they’re a marked company. They’re a target. They’re the dominant streaming service, but one that everyone wants to knock off.

Amazon will continue to build their user base. Their long game we’re certain is to move into live sports streaming. We say this as Amazon renews their Thursday Night NFL streaming for the 2018 and 2019 season.

We also know Facebook and Twitter will soon be getting into sports streaming. Facebook bid for the digital rights to the Indian Premier League cricket last year. And they recently inked a deal to stream Major League Baseball.

Twitter is also streaming Major League Soccer from the US. And at certain times you can find BT Sports streaming Champions League Soccer through Twitter as well.

Netflix for now doesn’t seem to be interested in sports streaming. They’re more interested in their content for us to scroll through.

We think it’s the wrong move.

Right now Netflix has the numbers. They have the content. But we think an absence of sports streaming will see them lose users. We think the profits will come and the users will move to where they can stream live sports. And these platforms will keep them by adding better content.

We think that Facebook and Twitter will continue to build bigger content libraries. And before you know it they’ll be outspending Netflix on content.

And the good stuff, the new release movies, will appear on Amazon, Twitter and Facebook.

Let’s not forget we’ve barely mentioned new competition to this space. Wal-Mart plans to join the game too. And then there are the likes of Tencent in China that are adding millions of users every year.

Competition for the streaming and scrolling user is getting hot. Netflix might be the current sheriff in town. But they might not be much longer.

Which leaves us with the question in our headline…Netflix, buy or sell? Well right now we think Netflix looks expensive. We know there is growing competition. We know content is king, but sports streaming might be the new king.

Frankly, Netflix might be one of the world’s biggest stocks that’s set for some hard times in the coming months.


Sam Volkering,
Editor, Secret Crypto Network

Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

He’s not interested in boring blue chip stocks. He’s after explosive investments; companies whose shares trade for cents on the dollar, cryptocurrencies that can deliver life-changing returns. He looks for the ‘edge of the bell curve’ opportunities that are often shunned by those in the financial services industry.

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