We’ve been bearish on Netflix for many years, and it seems as if the market is finally catching on to the issues with the business model that we’ve seen all along
The loss of licensed content, increased competition, and higher prices in the future mean investors should expect more disappointing subscriber numbers going forward.
The noise-trader momentum driving the stock is evaporating, the company’s mounting (and increasingly expensive) debt poses a significant near term liquidity risk, and the bull case is full of holes.
There is a “micro-bubble” in certain tech stocks, where valuations reflect expectations for future cash flows that would require unrealistically high margins, growth, and market share.
We believe the price increase signifies that Netflix’s competitive advantage has been wiped away. In order to justify its massive original content budget, it must raise prices if it is to ever meet the expectations implied by its stock price.
Investors should capitalize on the opportunity provided by Disney’s streaming service announcement and the market’s overreaction to earnings. Buy into a great company at an attractive valuation (Disney) and sell an overvalued company with holes in its business model (Netflix).
The surfacing of this ugly truth could be a catalyst for more investors to question the viability of Netflix’s business model and to send NFLX shares to a more rational level.
In the wake of 3Q16, Netflix (NFLX) is up nearly 20%. Is this price reaction justified? Have investors gotten too caught up in the “membership beat” or recently lowered expectations?
Issues include: unprofitable international expansion, dwindling competitive advantages, and a sky-high stock valuation. For a long time, the market has largely ignored these concerns. When investors finally accept the truth about this company and stock, Netflix (NFLX) could be in for a big sell-off.
2Q16 results reinforce our belief that Netflix no longer has a significant competitive advantage. When it tries to raise prices, as it did for many long-time members this quarter, it loses customers to rivals such as HBO (TWX), Amazon Prime Video (AMZN), and Hulu.
Investors should not be surprised that Netflix lowered guidance for subscriber growth for Q2 after announcing that many long-time users will face price increases starting in May.