360° Coverage : Netflix is a Great Company But a Terrible Stock

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Netflix is a Great Company But a Terrible Stock

Jan 24 2014, 3:02am CST | by

Can’t view the embedded player? See “Netflix: Good Company, Bad Stock” I chatted with CNBC’s Bernie Lo about Netflix's 4th quarter earnings.  Netflix beat expectations in every way a company can...

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27 weeks ago

Netflix is a Great Company But a Terrible Stock

Jan 24 2014, 3:02am CST | by

Can’t view the embedded player? See “Netflix: Good Company, Bad Stock

I chatted with CNBC’s Bernie Lo about Netflix's 4th quarter earnings.  Netflix beat expectations in every way a company can beat expectations, increasing its customer base, revenues, earnings per share and even its gross margins more than the consensus Wall Street estimates.  Shares shot up nearly 15% on Thursday on the results.

The two biggest concerns for analysts have been rising content costs and the loss of “net neutrality,” which potentially allows internet service providers to extort higher fees from Netflix in order to give its streaming service continued access to premium bandwidth.

With Netflix competing for content with Hulu, Amazon, Apple, and Wal-Mart‘s Vudu services–and with the content creators aware of Netflix’s subscriber growth–it only stands to reason that content costs should rise, which–all else equal–should erode Netflix’s margins.  Thus far, it hasn’t been reflected in Netflix’s results; top-line revenues have grown at a faster pace than content costs, and Netflix’s gross margins actually improved last quarter.  But when subscriber growth starts to level off–which will probably happen sooner rather than later, as over half of all American households with high-speed internet access already subscribe to Netflix–margins will inevitably suffer.

As for the loss of net neutrality, Netflix CEO Reed Hastings is unconcerned, commenting that no internet service provider would welcome the negative publicity that would come with aggressively targeting Netflix.  I actually agree with Hastings here and would add that reality is far less important than perception.  Truth be told, Netflix “should” pay more for the disproportionate amount of bandwidth it uses.  But viewers upset that their favorite Netflix programs are buffering due to reduced bandwidth are far more likely to take out their frustrations on their internet providers.  In the war of public opinion, Netflix would have the advantage.

Netflix is a great company.  I would go so far as to call it a revolutionary company, in fact.  Largely because of Netflix, TV viewers now expect on-demand programming available on any device at any location at any time.  Traditional media distribution channels—such as cable TV companies—are scrambling to adapt their offerings to match the format of Netflix.

But even great companies can be lousy stocks if they are priced too expensively.  Netflix currently trades for 325 times trailing earnings and 55 times expected 2014 earnings.

Now, to be fair, Netflix should trade at a premium to the broader market.  It’s a fast-growing company and it deserves a high multiple.  But 55 times expected earnings?  That assumes that the high growth of recent years will continue indefinitely, which is a very dangerous assumption to make.

I also don’t like the persistent insider selling by company management.    As I noted in the interview, it is not uncommon to see insider selling in relatively young start-up companies.  Yet in Netflix’s case, the insider selling is heavy and persistent enough to get my attention.

Final analysis?  Netflix is on a roll, and it might be a fine short-term momentum trade.  If you are willing to watch the trade carefully and use stop losses or other risk management tools, then I would say buy it with your speculative “play money.”  But at current prices, Netflix is a terrible investment, and I wouldn’t recommend putting a dime of your retirement nest egg in its stock.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here  to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.

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Update
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7 weeks ago

RM47mil KWSG contributions still unclaimed

Jun 9 2014 7:54am CDT | Source: Business Times Malaysia

KUALA LUMPUR: About RM47 million of contributions in the Teachers Provident Fund (KWSG) still remain unclaimed, the Dewan Rakya ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
9

7 weeks ago

Gold shop lost almost RM1mil

Jun 9 2014 3:50am CDT | Source: Business Times Malaysia

KANGAR: A gold shop owner lost almost RM1 million after after the safe on in his shop was broken into by ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
8

7 weeks ago

Motion to debate MAS losses in Dewan Rakyat rejected

Jun 9 2014 3:39am CDT | Source: Business Times Malaysia

KUALA LUMPUR: AN emergency motion to debate the losses incurred by Malaysia Airlines last year, amounting to RM1.2 billion was rejected by ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
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7

7 weeks ago

MH370 Tragedy: Hisham: RM27.6 mil spent on 1st phase of SAR

Jun 9 2014 2:11am CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia spent some RM27.6 million in its first phase of the search operations for missing Malaysia Airline flight MH370, said Acting Transport Minister, Datuk Seri Hishammuddin Hus ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
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7 weeks ago

9.1m litres of diesel seized in a month

Jun 8 2014 1:11am CDT | Source: Business Times Malaysia

PUTRAJAYA: The Domestic Trade, Cooperatives, and Consumerism ministry has seized some 9.1 million litres of diesel and property worth RM58 million since mounting ‘Operasi Diesel Selatan’ in the southern states ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
5

8 weeks ago

Girl, 9, awarded RM2.78m compensation for medical negligence

Jun 6 2014 4:56am CDT | Source: Business Times Malaysia

KUALA LUMPUR: A nine-year-old girl who suffered brain damage during her birth at a government hospital was awarded over RM2.78 million ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
4

8 weeks ago

Malaysia's total trade in April up 12pc

Jun 5 2014 11:52pm CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia's total trade in April 2014 rose by 12 per cent from a year ago to RM123.86 billion due to growing trading activities, International Trade and Industry Minister Datuk ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
3

8 weeks ago

Works Ministry to spend RM20m for upgrading works at 50 accident black spots

Jun 4 2014 11:35pm CDT | Source: Business Times Malaysia

JOHOR BARU: The Works Ministry will implement upgrading works at 50 accident prone locations in the country that have been identified this year involving an allocat ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
2

8 weeks ago

Najib launches loan scheme for Ramadan traders

Jun 4 2014 10:24pm CDT | Source: Business Times Malaysia

PUTRAJAYA: Prime Minister Datuk Seri Najib Razak today launches RM45 million Ramadan ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
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1

8 weeks ago

Residents bring up objection against Kidex to Suhakam

Jun 4 2014 4:49am CDT | Source: Business Times Malaysia

PETALING JAYA: A group of 20 Petaling Jaya residents held a meeting with the Human Rights Commission of Malaysia (Suhakam) over their objection against the proposed RM2.2 billion Kinra ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 

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