Why Netflix Is a Buy…but Not for Investors

For the longest time, I never wanted to pay for Netflix.

I knew that 10 bucks a month would encourage me to be less productive.

I don’t know about you, but I never felt the best after binging on TV shows and movies. It just feels like a waste of time at the end of the day.

While I had a problem paying for a subscription, I never really had any qualms about logging onto my sister’s account and watching something.

The power of free, I guess.

But since she’s gotten rid of her account, my wife and I are stuck with YouTube or whatever’s on TV. It was only a few days ago that I had a change of heart.

I am considering something I’ve been so against for months. I am thinking about buying Netflix.

How could I say no to a 10-part series on the 1997–98 Chicago Bulls and Michael Jordan’s last season in the NBA?

Free report: Aussie stock picker, Sam Volkering (with gains as high as 1,431% in the last 18 months) reveals what he believes are his next four big potential winners.

Is Netflix the best FAANG pick?

The content on Netflix keeps getting better. I’m basing that on their big win at the most recent Golden Globes. CNBC writes:

Netflix raked in five Golden Globes on Sunday night, proving its investment in original content is paying off in critical acclaim. The wins come as the streaming service anticipates the potential loss of key licensed programming, including content from Disney, which is preparing its own streaming service, and the hit sitcom “Friends.”

Netflix won more awards at Sunday’s show than any other network or streaming service with three wins on the TV side and two for film, according to Deadline.

And how could this not be good for the stock? That’s how investors are thinking, anyway.

Among the FAANGs (Facebook, Apple, Amazon, Netflix and Google), Netflix is the clear winner in 2019, for now.

The stock is already up 23%. And we’re just in the second week of 2019. On the back of their Golden Globes wins, Netflix added billions more to their market cap.

And according to analysts, this stock has even further to climb. Tim Nollen from Macquarie Capital points out that Netflix doesn’t have any specific problems.

Most of the FAANGs have really specific issues they’re dealing with, but Netflix doesn’t,’ he said.

It doesn’t have growth issues like Apple, and it doesn’t have self-inflicted issues like Facebook.” He has an outperform rating and $US315 price target on the stock.

In addition, whereas the other FAANG companies have been on a steep international growth curve for several years, Netflix is only getting started with international growth. That’s where the real bull story is.

Justin Patterson at Raymond James also thinks Netflix still has legs. ‘The fundamentals are very different across the FAANG companies,’ Patterson said.

Netflix is a subscription business with zero China exposure, meaning nothing major can hit it from a trade-war perspective, whereas Apple obviously faces some impact.

Plus, there are people like me. The last few that have had a taste of Netflix, but are yet to fork over the monthly fee.

According to Bloomberg data, you might see Netflix grow sales by 28% in the upcoming quarter. It all sounds pretty good…

So, why not buy stock?

More value in the subscription than the stock

The analysts could be right.

Netflix might be the best buy out of the FAANGs. But the best buy for who? Certainly not investors.

Netflix is a buy for traders. Buying Netflix is a bet on momentum.

And if that’s your plan, you better watch the stock like crazy. As soon as subscriber growth and the Golden Globes wears off, that 224 multiple Netflix trades on will nose dive.

I don’t agree with Nollen when he says Netflix doesn’t have any specific problems. Their price-to-earnings (PE) ratio of 224-times is a big problem.

Buying into such a multiple is not investing. It’s speculating. You’re essentially betting on prices rather than focusing on what the business can earn.

For now, Netflix has momentum on their side. And analysts don’t want to miss out. It’s why they talk about China and international expansion.

These are the excuses (and not very good ones) to buy the stock now. Ask yourself, will future growth be nearly enough to justify this ridiculous multiple?

I don’t think so, but I could be wrong.

Throughout history, the investor who bought and held expensive stocks is usually always the stock market loser. Those investors piling into Netflix now won’t be the exception, in my opinion.

Your soon to be streaming friend,

Harje Ronngard,
Editor, Money Morning

Special 2019 report: The next generation of Aussie income super stars revealed. Hint: it’s not the banks. Click here to claim your copy now.


Harje Ronngard is the lead Editor at Money Morning. He’s also the Editor of Wealth Eruption and Gold & Commodities Stock Trader, and co-Editor of the Third Wave Portfolio.

The aim of both Wealth Eruption and the Third Wave Portfolio is to find misunderstood opportunities. These are the type of investments that multiply small amounts of money five- to 10-times in size.

Harje has an academic background in investments and valuation. He’s had experience across a range of asset classes, from futures to equities.

For any investment, Harje believes you only need to ask two questions. What is it worth? And how much does it cost? These two questions alone open up a world of opportunities, which Harje shares with Money Morning readers five days a week.


Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia