Is Netflix (NFLX +0.27%) stock a buy today? There are no easy answers to this amazingly simple question.
Netflix may look like a great buy for some investors but a downright sell for others. The final verdict will depend on your assumptions, your risk tolerance, and a plethora of other variables. It's a nuanced scale between the "buy" and "sell" extremes, and you'll find this to be true for nearly every stock on the market. Warren Buffett's favorite book on investing theory devotes separate chapters to stock selection for growth and value investors, you know.
Let's find out exactly where you should land on that bull-to-bear gradient.
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Three reasons to stay away from Netflix
- Share prices have doubled in six months, skyrocketing 170% over the last 52 weeks. Whatever rises that fast must surely come back down someday.
- Netflix stock is now trading at 240 times trailing earnings and 42 times the company's book value. That lofty $172 billion market cap rests on skimpy profits and negative free cash flows. The only way Netflix can execute its current business plan is by adding lots and lots of new debt to its balance sheet. None of these are hallmarks of a strong Buffett-style value investment.
- The entertainment industry is brutally competitive and Netflix is running out of allies. Content producers are sure to raise prices on their distribution licenses for top-quality movies and TV series as each existing deal comes up for renewal and renegotiation. Favored partner Walt Disney (DIS 2.40%) is walking away from its Netflix contracts at the end of 2018, preferring to start its own streaming-video platform instead. So Netflix is facing higher content costs and a smaller universe of available titles at the same time.
Just one of these strikes against Netflix -- your choice -- could be deal-breakers for traditional value investors. Taken together, it's easy to panic and run far, far away from this risky stock.
But that's not the whole story.
Three reasons to buy Netflix shares today
- Skeptics have argued that Netflix is overdue for a big correction since investors started to forgive the company for the Qwikster incident in 2013. If you sold your Netflix shares at that point, you missed out on a 2,900% return in 5 1/2 years as the streaming-video veteran kept proving the critics wrong. Why should this pricing plateau be any different?
- You know that old adage about previous returns not guaranteeing future results? That holds doubly true for high-growth companies like Netflix. The company has been eschewing strong earnings and cash flows in order to maximize subscriber growth in this formative phase of the global video-streaming market. The domestic division has switched over to a highly profitable model already and various international markets should follow suit over the next few years. You have to see what's coming a few years down the line if you want to justify and/or explain Netflix's soaring stock prices. And on that note, Netflix often exceeds its own growth targets. We're looking at the early years of a future titan of the entertainment industry.
- As for the tightening content market, Netflix is working around that issue by focusing on in-house productions. Netflix originals can reach award-winning-quality levels, reducing the threat of other studios locking the company out of their catalogs. This strategy also opens new business vistas down the road. When 13 Reasons Why and Stranger Things do what they can to drive new subscribers directly into Netflix's services, the company can sell Blu-ray copies and syndicate the shows to traditional broadcast channels. Netflix is pouring $8 billion into content costs this year and a large portion of that expense is going into original content. The long-term goal is a 50/50 balance between original production costs and licensing from other studios, up from 25% originals in 2017.
If you expect Netflix to keep its worldwide growth trends going for several years, driven by in-house productions and economies of scale, then you'll find the current share prices quite reasonable. My own analysis leans in this direction, and Netflix will probably remain my largest stake in a single stock for the long haul. There's so much untapped growth left to explore -- before Netflix takes the next sharp, unexpected turn into whatever lies beyond a global streaming-video empire.
Your mileage may vary, and Netflix might not be the best fit for your own portfolio. But for long-term growth hunters like me, it's a perfect fit.
So yes, Netflix is a buy at these prices -- for some of us.
