Readers of my column know that I am not prone to hyperbole. However, I see a market situation that is so dangerous that I must warn you about it. If you are an average investor, and you are invested in Netflix, you are risking your entire financial well-being by not selling RIGHT NOW.
Here are my top five reasons why you must sell NFLX stock. This isn’t me being irrational. I see great risk in NFLX stock.
1) This is 1999 all over again.
During the internet bubble of 1999, stocks were selling at triple-digit multiple with little or no earnings, and not much prospect of real earnings, either. The result was devastation, as all of these stocks were destroyed or went bankrupt.
NFLX stock is in the same position today. It trades at 333 times its trailing twelve month earnings. It is valued at $55 billion on $162 million in net income.
In order for Netflix to trade at a reasonable P/E ratio — something like 33x — it would have to increase its net profit by ten-fold to $1.62 billion. The only way to do that is to more than triple subscribers AND triple pricing. As it is, NFLX charges $8 domestic and $21 international. You think either of these goals is achievable? NO WAY. SELL NOW.
2) Streaming is a commodity.
NFLX is a dumb pipe! It does nothing special. It distributes content. It does not solve a problem because everyone can stream content now. All of its competitors have streaming capability. A Roku offers all the options under one roof.
Commodities are the worst businesses to invest in. It becomes a race to the bottom as margins shrink. The difference is that all NFLX competitors have way more money than it does so they can afford the thinner margins. They also have pricing power, and NFLX does not because it has a weak balance sheet, expensive debt, and NEGATIVE CASH FLOW!
3) NFLX makes no money and is burning cash.
NFLX only made $162 million in the TTM. NFLX stock is burning cash at a rate of $500 million per year. The high margin DVD segment is about to die. Domestic streaming growth it slowing. International streaming, despite having 24 million subscribers and charging them $22 per month, is LOSING money.
NFLX stock will have to raise prices on consumers and raise more capital, either burdening it with more interest payments, or diluting shareholders with equity.
4) It is valued as a subscriber operation when subscribers have no meaningful value.
Subscribers only matter if a service is sticky. NFLX is not sticky. It is a commodity.
Look at every earnings announcement. The market reacts based on one thing only: subscriber count. The market ignores negative cash flow, low net profit, increasing competition and unprofitable international.
At some point, the market will wake up, realize that subscribers mean nothing and NFLX stock will crater. SELL NOW.
5) International expansion will kill NFLX, not help it.
While NFLX will work in many countries, it won’t work in all of them. Cultures are different and they do not value streaming media the way Americans do. In addition, China will not be welcoming. The government controls all media. It will censor most of the content that NFLX will have, for reasons beyond Netflix’s control.
American content simply does not play in other countries. Did you know that a big hit here, like “Bridesmaids”, made $196 million in the US and only $120 million internationally. Of that $120 million, 80% came from Western Europe. The rest of the world doesn’t care about our movies. And NFLX IS ALREADY IN EUROPE and it is losing money.
China? Forget it. China has a gigantic film industry on its own. It has its own streaming media services already. China doesn’t want US content. The cultural gap there is huge. Chinese audiences want Chinese characters.
6) Management has sold out.
Why would you buy a stock when management has sold out of almost all its holdings? NFLX stock management owns 1.82% of the company. That’s it. Why should you be the sucker holding the bag when they’ve already gotten rich? SELL NOW.
7) Hedge funds will lead the way down.
Hedge funds have been greedy. They’ve been buying in the low 100’s. As soon as the stock breaks $119, it will trigger computerized trading and they will all sell out. As it is, one big fund sold out of its stake recently. SELL NOW.
8) Carl Icahn sold.
Carl Icahn is THE most successful investor ever, even more so than Warren Buffett. He sold NFLX stock. Why would you hold it? SELL NOW.
9) Regret is the worst.
There will come a day when the crash happens. When, not if. You think you’ll keep a cool head but you won’t. Why risk your financial health with a stock that carries this much risk when you can do very well with time, patience, and a diversified portfolio?
Get out of Netflix stock now. Before it is too late.