Oh. My. Goodness. Today's post is about Netflix. It's down 25% as I type. Yeeeeeesh!
So what happened? Well, bad earnings. Again. But here's the thing - this story gets more interesting. I don't own any Netflix, but I am watching it since the well known investor Bill Ackman plowed $1 billion into it last quarter. Oh, and by the way, OUCHY... He's now lost $250 million on that investment.
Kids, don't forget, it's not a loss until you sell 😜
60%... That's how much Netflix is down since its all-time highs a few months ago. Anyone who bought at those highs has been cut in half and then some. Investing and trading is not easy, and over the years, this always happens. Drawdowns, crashes, and bull markets and bear markets all come and go. The Netflix story fits all of that. Maybe that's why I felt like writing about it. I should also be totally clear: it's on my watchlist for a trade.
Let's dive in a little more, though, before deciding if we even should trade it.
I was pretty surprised to learn that Netflix's PE ratio is the lowest it's been in over 10 years. Netflix has a PE ratio in the 20s. If you look forward a year or so, its PE ratio is more like 18. At this point, you have to wonder, is Netflix a value investment? Wait, it's no longer a growth stock? Talk about the end of an era. I never thought I would see Netflix trading at a PE ratio like IBM.
The thing is, if Netflix can actually start churning out free cash flow at these levels, it really might be an epic value investment. It would also mean buyback time for them. Netflix has about $7 billion in cash. Surely they want to use some of this for their reinvestments, but also, at multi-year lows, a $2 billion buyback here is almost 2% of the company. Reed Hastings is a smart dude. He knows.
Let's keep going.
Netflix's market cap is approaching 100B again. This is its lowest valuation since 2019 and 2018. In Both instances, Netflix bounced and bounced rather quickly.
Hold up, Stef. Hold up. Are your really writing about potentially buying the dip in Netflix? No. Not at all. I am only thinking out loud. There is a bearish cash.
As most of us know, Netflix now has more competition than ever. There are more and more streaming platforms. In addition, is their content even that great? How does it compare to other companies? This is a determining factor as well. And, if it is the case, Netlfix is value trap. It will compete and compete, but no longer be a shiny growth stock.
Anyways, those are my thoughts. Streamlined and free to all of you. No subscription required.
I'll share an update if I actually trade this. In the meantime, my feet are up and I am watching in awe. The best entertainment is markets.
25% of its market cap gone because they lost 0.09% of their users? Sentiment driven volatility is insane. A lot of people are going to end up regretting life choices in 3-5 years time lol.
it's getting close to the point where I might like to start selling puts. 10 more percent lower from 250, 225 or so... selling 200 seems like a no brainer
PhilHudson82
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NFLX falls into the category that many meme darlings do: "broken growth" stock. Same category as BABA, PTON, and others.
What do you do with a growth stock that is no longer growing? Unless there's a dividend or something (and there is not), you have no way to make any money out of it. The best you can hope for is that they'll do a share buyback, and I don't know enough about NFLX to know if that's in the cards or not.
The core business has major issues. Their pandemic tailwind is fully dissipating. Their own forward projections are for further decline in their subscriber base. It seems likely that, at this point, most of the people that want a NFLX sub already have one, so where would growth even come from? Your only hope is that people in developing countries in SEA might come on board in coming years as their citizens climb the value chain of the global economy, but instead of NFLX, some local, endogenous company (that probably doesn't even exist yet) is likely to reap that windfall, rather than Netflix.
NFLX is being exposed right now, just like PTON. The stock was priced on the assumption of neverending growth, which is never a valid assumption because neverending growth isn't a thing. You eventually have to transition to something else. The big problem with NFLX stock as an investment is that the company is a cash cow but right now, there is no mechanism for that cash to trickle into shareholders' pockets. They need to institute a dividend or something. They make big money every month on their subscriber base. They have the cashflow to do it.
If they don't do it soon, their stock will only continue to fall...because why wouldn't it? Why would somebody buy a piece of paper that doesn't actually do anything for YOU, personally, as a shareholder? It's great for the company that they make lots of cash on subs, but why should a shoreholder care about that if the money doesn't trickle down to you?
VigorousEgg
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@PhilHudson82, They cannot grow because growth in the West is done and the rest of the world does not want to see their forced social programming. Butch women, weak men, unnecessary amount of LGBT etc. They lost 700 000 subscribers due to sanctions in Russia. Ok, but Russia has 140M people and they only managed to sell to 0.7M? Yes, because only Westerners and only some of them are into the sjw thing.
robed1
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@PhilHudson82, at least my gold glints in the sun and makes nice cocktail conversation.. lol
Couldn't have happened to a better WOKE company. Netflix is done. Stick a fork in it.
Options360
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NFLX is famous for these post market earnings drops. Wallstreet placed a heavy collar strategy on it. No way NFLX is going up this week. Definitely wait for any long entry, unless you got a put before close today. Then I'd get long out of the gate at opening bell tomorrow, just for insurance to protect the huge gains on the overnight put profit.
PhilHudson82
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As an aside, and not to derail the conversation: same problem AMZN has. Broken growth stock, hasn't actually gone up in 1.5 years. Why would it? Who would buy it? It's a cash cow whose cash doesn't actually redound to the investor by any regular mechanism, only the desultory buybacks that AMZN does, and they haven't done one in a while.
Big whoop, who wants that? Well, apparently nobody. That's why it's back down the same price it first hit 1.5 years ago. 1.5 years is a long time to go without any net return from a "growth" stock.
Sentiment driven volatility is insane. A lot of people are going to end up regretting life choices in 3-5 years time lol.