Things Just Keep Looking More Precarious for Netflix Stock

It’s been exactly two months since I warned investors to stay away from Netflix (NASDAQ: NFLX) stock on August 9. Since that time, Netflix stock is down 11.9%, and now is still not the time to buy.

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It might be tempting to jump in and buy NFLX stock down 28% in the past three months. Yes, Netflix stock is cheaper than it was three months ago, but it is still trading at a steep market premium that hinges on its ability to continue to deliver impressive growth and keep costs under control.

Most importantly, Netflix must fend off an imminent and unprecedented barrage of competition from Walt Disney (NYSE: DIS) and others.

Nothing Has Changed

The only thing that has changed about Netflix in the past two months is that its stock has drifted lower. Netflix’s third-quarter numbers are still a big risk considering how it missed subscriber growth expectations by 46% last quarter.

Netflix has historically bounced back after disappointing quarters. That’s somewhat reassuring for investors, but it also places tremendous pressure on Q3 results. Another miss would suggest that this time is different than previous misses. In fact, it could actually represent the beginning of a slowdown in growth.

By the end of next month, Disney will launch its Disney+ streaming service, a direct competitor at a much lower $6.99 monthly price point. In fact, Disney has said it plans to bundle Disney+, Hulu and ESPN+ for $12.99 per month. That’s three services for the price of a standard Netflix subscription.

Disney’s library of children’s content and its family-friendly approach may be particularly appealing to parents.

Apple (NASDAQ: AAPL) is also launching Apple TV Plus for just $5 per month starting on November 1. And Amazon (NASDAQ: AMZN) is upping its Prime Video and music content budget to $7 billion this year.

Wall Street’s Take on Netflix Stock

Since I last wrote about Netflix, several analysts have weighed in. On Sept. 23, KeyBanc analyst Andy Hargreaves said Netflix’s setup into third-quarter earnings isn’t ideal.

“Only a significant beat with strong growth in mobile plans seems capable of addressing competitive concerns, while a miss could impair bullish views,” Hargreaves said.

He said the risk for NFLX stock is to the downside for the time being and reiterated a “sector weight” rating.

The same day, Wells Fargo analyst Steven Cahall said subscriber growth, pricing and content spending are becoming an increasingly complicated and delicate balance for Netflix. If the company makes any mistake in balancing those metrics, its valuation creates the potential for an extreme downside.

“At 50x CY20E estimated [enterprise multiple], ~6x EV/Sales, and an imponderable [free cash flow] yield (we don’t expect break-even cash until 2022), there’s too much opportunity for the [key performance indicator] interplay to yield the disappointing results we saw in Q2,” Cahall said.

Wells Fargo reiterated a “market perform” rating.

On Oct. 7, Nomura Instinet analyst Mark Kelley said he is expecting Netflix to report 800,000 domestic subscriber adds and 6.2 million international subscriber adds for the third quarter. While impressive, both numbers are below consensus analyst estimates.

“Though it’s a bit early to be talking about 4Q, we believe numbers need to be near perfect as any wrinkle in the results will make it easy for bears to point to new competition in the marketplace as having an impact,” Kelley said.

“Near perfect” is never where investors want to see expectations set. Nomura reiterated a “neutral” rating.

How To Play Netflix Stock

Despite all the caution, negative catalysts and valuation concerns, none of the analysts slapped a “sell” rating on NFLX stock.

As I said two months ago, there’s plenty to love about Netflix. Most of all, its growth numbers are still staggering. The only problem is that the market has been expecting staggering growth numbers for a while. The crazy high valuation of NFLX stock is assuming staggering growth will continue for several more years.

At this point, I would say shorting Netflix is as dangerous as buying it. If Netflix navigates the next couple of quarters unscathed, it will be hard to argue anything could derail the company or its stock in the next decade.

In the meantime, investors should consider taking Wall Street analysts’ advice and staying on the sidelines. Too much can go wrong for Netflix in the next few months, and the stock’s valuation suggests it could easily tank another 50% or more if it does.

There may be a time to buy NFLX stock again in the next six months. Given all the near-term risks, now is simply not that time.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.