Netflix: Valuations, Competition, And Questionable Accounting Point To Potential Crash

Netflix (NFLX) may undergo one of the greatest collapses, and even bankruptcies, in stock market history.

It is not only the fierce and increasingly-powerful competition, subscriber growth hurdles, and enormous valuations that could cause Netflix's rapid downfall each on its own; but also, and even more devastating, it is the tremendous (and mostly hidden) debt, extremely weak financials, insider selling, and numerous accounting "red flags" that potentially make Netflix one of the best short opportunities ever.

To be fair, Netflix (NFLX) is an exceptional service and still a top source for video streaming and content. It "disrupted" the media industry and was a leader in this new form of video technology. Netflix should be commended for its revolutionary effects on media and technology as well as its award-winning original content, among other achievements. Partly or mostly due to Netflix, we can now get millions of videos on demand, anywhere we go. Furthermore, the "On Demand" trend in media consumption is relatively still in the early to mid stages, and media companies don't truly know where the future is heading. Many have discussed the trend away from traditional cable, known as "cord-cutting". Interestingly, we may be seeing a shift towards an "a la carte" or "pay per view" model where customers choose specific channels, events, or videos rather than paying for a large package with many channels they don't need.

It is definitely possible for Netflix to succeed. Netflix could very well continue to grow its subscriber base, flourish in its international expansion, and produce more massively-popular and award-winning original content.

Source: SEC, Netflix 10-K

However, just because Netflix is a great service or company doesn't mean it's a great stock. In fact, Netflix (NFLX) is a terrible stock, and here's why:

1) EXTREME VALUATIONS

Netflix has already seen a significant drop its stock price (down over 30% from it's December 2015 high), yet its valuations remain highly inflated and not sustainable.

(Click on image to enlarge)

Source: Finviz

P/E --> With a market capitalization of $39 Billion as of January 31, 2016 (was over $50 Billion), Netflix has a sky-high Price-to-Earnings (P/E) Ratio of 328 and a Forward P/E Ratio of 85. A P/E ratio higher than 30 or 50 is generally too much even for fast-growing technology companies.

P/B and PEG --> Netflix's Price-to-Book (P/B) Ratio is 17.66, and its PEG Ratio is above 10, both extremely high considering these ratios should ideally be closer to 1 or 2. They are exponentially higher due to high investor expectations, but expectations are perhaps too high.

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Comments

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Joe Economy 4 years ago Member's comment

Yoni, you certainly make some valid points here. Seeing the once invincible stock drop 28% year to date is somewhat worrying, but I dont think we've heard the last from this company. What is encouraging is the upgrade from Piper Jaffray this week (Feb 2nd) going from neutral to overweight with a price target of $122 (approximately a 33% in upside based on Tuesday's close). Jaffray shows that too win at stocks sometimes you have to go against the tide.

Kurt Benson 4 years ago Member's comment

Excellent post on $NFLX that gives me much to think about. I agree with much of what you said but I think there are some emotional factors that you left out which should not be negated.

1. I think on average, Netflix customers are fiercely loyal compared to other companies.

2. Netflix has a great product which they keep improving upon. Netflix is actually more reliable than my cable provider.

3. Netflix has the first movers advantage. Even $AMZN hasn't made much of a dent and they are giving away their video on demand service free to their millions of prime customers. I get Amazon instant video free, yet I still prefer Netflix.

Sunny L. 4 years ago Member's comment

Really interesting read and though I'm new to this, it's making me think Netflix may not be the sure bet that I thought. That being said, I am one of those fiercely loyal customers you mentioned and I think many others are as well.