Netflix Stock Plummets

I knew that it was only a matter of time before the stock of Netflix (NFLX) took it on the chin. I have been writing about Netflix’s stock for almost two years explaining that the company’s valuation was absurd. I have told investors to sell Netflix stock a countless number of time. Well, the day came that I had talked about for a long time. Netflix announced that the company’s numbers were way too optimistic and the stock has been taken to the woodshed.

Netflix Stock Drops

Netflix earningsNetflix is down 20% today and has lost $40 a share off of its valuation. Ouch! Netflix’s shares are currently trading at $168. The stock is down 45% this year alone. That $300 plus stock price seems like such a long time ago. Netflix lowered its subscriber base estimates from 25 million to 24 million for this quarter. The company underestimated the impact that its recent price increase would have on its customers and has lost over half a million subscribers since raising its prices.

Netflix is having trouble passing its rising content costs onto customers. Netflix has a great business that can make money for the company but is still only a middleman at its best. Netflix has no control over pricing. The company does not create the content that it depends on for survival. The company is at the mercy of content providers who can charge Netflix whatever price that they choose for their content. If Netflix balks then the company will lose the rights to the content as it did with Starz. Also, there is nothing to stop companies from distributing their own content.

The growth rate estimates at Netflix were unrealistic nd the huge drop is actually good news for investors that have been waiting to buy Netflix. I wouldn’t buy in today because it would be like trying to catch a falling knife. I would watch the stock over the next few days and see where it settles. I still do not want to buy shares at this level but the stock is not a terrible buy at $148. I will continue to stay on the sidelines with this company.

The lesson that fundamental investors should learn is to avoid overpriced stocks like Netflix and stick with cheap stocks.

Next up on my overvalued stocks list is Salesforce.com (CRM)

Comments

  1. On one hand, Netflix has an easy-to-replicate business model and its losing its competitive advantage of being the first in the game.

    On the other hand, streaming video is cheaper (for the company) than mailing videos. If Netflix has fewer customers BUT many of those customers are paying more AND it substantially reduces its operating budget, this move could be a win.

  2. avatar Inveska says:

    It’s definitely a tough spot to be in for Netflix. They need their customers to switch to streaming to have the leverage they need to negotiate with the studios. In the short term, it’s inevitable that this will be a painful move that causes them to lose subscribers. And you’re right – when the stock is already pricing in large subscriber GAINS, it is extra painful for shareholders.

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