Netflix (NFLX, Financial) is an online video streaming company that derives its revenues from monthly membership fees for services consisting of streaming TV shows and movies across several platforms/devices.
The company’s stock price has continued to surprise analysts, as it continues to soar even when online retail giants like Amazon (AMZN, Financial) continue to threaten its dominance in the market. Some analysts, however, have remained critical that the bubble will soon burst on Netflix stock.
Some investors are also looking at the company’s high P/E ratio and all they can do is spell doom for this stock, but yet, Netflix’s stock price is still rallying albeit with notable pullbacks and rebounds. Netflix is currently one of the most unpredictable stocks in the market given the behavior of its stocks price.
It seems to rally when it should be falling and this has led to some labelling it a "fool’s gold”, which is a financial term used to refer to stocks that tend to receive credit that they do not deserve. So is Netflix really the latest “fool’s gold” in the market? Let’s examine.
A Quick Rundown of Key Items
Previous price hikes sent the stock to a debacle at the end of the second quarter, which saw the stock’s price take a tumble. This was met by skeptical investors who are unwilling to pay high prices for the online streaming company.
The company fell way short of its targeted 2.5 million new subscribers in the second quarter,Ă‚ recording a little over 1.7 million subscribers. This has been attributed to cancellations as a result of increased monthly subscription costs.
Netflix stock has tumbled 13% year to date, leaving investors puzzled. When you look at the performance in the last two months, the stock is up 10% and that’s after factoring in the latest pullback. As such, the stock could appear as an attractive buying opportunity when you look further back, but for those who tend to take a closer look, it might as well be a good time to sell.
Netflix appears to have completely ignored the rivalry offered by other online streaming companies such as Amazon, Hulu and Time Warner (TWX, Financial), which are out to fight for their share of the market. Netflix appears to be strongly betting on its global expansion, but new subscription numbers appear to suggest that it could be a long journey before this campaign pays off as planned.
Nonetheless, there are those who still rate Netflix highly, with Ralph Schackart, a senior analyst at William Blair, having upgraded the stock to an outperform rating recently.
The company is expected to report third quarter earnings after market close on Oct. 17, and investors will be keen to see how many new subscribers joined as well as the total number.
Regardless of the slowing subscription growth, Netflix revenues are expected to increase on a year-over-year basis given the numbers that have already been added in comparison to last year. The higher subscription fees are also expected to boost top line for the video streaming company.
Conclusion
Netflix traditionally trades at high P/E ratios. Its current P/E ratio of about 310X may appear to be too much for a company that is already being questioned on its ability to continue growing subscription numbers.However, the company just launched its global expansion campaign at the beginning of this year.
In summary, Netflix surprisingly appears attractive when you look at it from a wider time frame. In December of last year, the stock traded above $130 per share, which suggests that at the current level of less than $100 per share, there could be room for an uptrend.
Nonetheless, the circumstances have since changed as the increase in subscription fees and membership growth rate appear to be squeezing. This makes the stock very unpredictable. So is it a “fool’s gold” now?
Disclosure: I have no position in any stock mentioned in this article.
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