Netflix: Time to Sell?
10/05/2017 6:00 am EST
It’s crazy to imagine, but the popular streaming company was trading at just $7.93 a share only five years ago. Today, the stock is flirting with all-time highs at $180. That’s around a 2,170% return for anyone who committed to a buy-and-hold strategy back in 2012.
But as any seasoned investor understands, markets aren’t always rational. Emotions and hype can inflate the value of a stock. As we’ve seen countless times before, greed especially can fuel unbridled optimism, inflating what investors are willing to pay.
Today, the numbers behind Netflix’s stock would likely make most seasoned value investors (folks like Warren Buffett and Charlie Munger) sneer and chuckle. The company trades at 7.8 times sales and 217 times earnings, which are absolutely absurd figures pertaining to value.
The reality, though, is that Netflix is no longer the $200 million David-versus-Goliath growth story it once was. The company is now valued at around $80 billion, making it an imposing colossus in its own right.
Aside from the simple matter of valuation, Netflix is facing increasing pressure as it pertains to content.
In August, Netflix was dealt a major blow after Walt Disney Co. (DIS) announced it would be pulling its Disney- and Pixar-branded films from the streaming service.
This blow from Disney comes alongside 20th Century Fox and FX announcing they would be pulling some of their hottest shows from Netflix starting later this year after striking a deal with Hulu.
With announcements like these, the market is coming to terms with that fact that studios are striking back at Netflix by reclaiming their old shows and effectively starving it of any third-party content.
In order to prevent this from happening, Netflix is being forced to throw down incredible sums of cash — as much as $6 billion in 2017 alone and $7 billion in 2018. For perspective, the company’s trailing twelve-month revenue is $10.19 billion.
Unfortunately for Netflix, this isn’t an expense that’s going to let up anytime soon, and with margins already thin at 2.36%, that’s not a positive sign for shareholders.
With Netflix failing to break through resistance at $189 first in July and again in September, investors are now looking at an infamously bearish indicator: the double top. It’s only natural at this point to wonder whether the company’s once explosive momentum is finally sputtering out.
Of course, calling an exact top is difficult, and trying to time the market perfectly is typically a fool’s errand, but when push comes to shove, there are more reasons to sell right now than there are to bet Netflix will continue its upward climb. Yes, the momentum continue but, in my opinion, it simply isn’t worth the risk.