Netflix (NFLX) has been all over the news lately with the CEO apologizing for the loss of subscribers and the company revising its estimate down. I wrote an article on September 5th discussing why Netflix was bad and people should consider shorting it. It can be found here.
The stock is down 40% since that date. For months, I dreamed of shorting Netflix, but didn't want to take the risk as speculation kept pumping the stock higher. Then, as soon as Netflix announced that it would be increasing prices, I reconsidered. The stock was fairly flat after the news was announced. I realized that this would be a perfect time to start. The company is unable to execute on its growth strategies properly so it is trying to maximize its revenue.
Here is a list of 5 reasons why I believe Netflix will hit $70 a share.
- Price increases at the company have allowed competitors such as Coinstar's Redbox (CSTR) and Amazon's (AMZN) streaming services to gain market share. Redbox plans to unveil a new streaming service that will cost only $1 for streaming a movie. Amazon is going to integrate its LoveFilm division as well.
- Qwikster will end up costing Netflix more money. The video game market is extremely competitive with companies such as Gamestop and Gamefly having a large market share.
- The company just recently lost its contract with Starz. These studios have all the bargaining power and any loss of a major TV series would be detrimental to the company's earnings.
- Michael Pachter, analyst at Wedbush, predicts Netflix's streaming content licensing costs will rise from $180 million in 2010 to a whopping $1.98 billion in 2012. If this is the case then Netflix could actually start generating a loss. A hefty streaming fee like this would make it difficult for the company to survive.
- The biggest reason Netflix will fall is the simplest. The valuation of Netflix is priced for growth, which will most likely not come to fruition. The forward P/E is 19 and based on the loss of subscribers, this will probably continued to be revised downward.
The sad thing about Netflix is that most investors knew this was coming. Billionaire fund manager Whitney Tilson initiated a short position awhile back, but covered when the stock rose. When company's like Netflix fall this much, it just goes to show you that the market will eventually reflect the fundamentals. Always go with your gut instinct. Simplicity is the key to investing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.