Why It's Time To Short Netflix (And Chill)

| About: Netflix, Inc. (NFLX)

Summary

We examine the extent to which NFLX is overvalued from a relative valuation perspective.

We consider the story behind the name and catalysts for movement.

We apply the broad market environment and its impact.

Netflix (NASDAQ:NFLX) has been gaining more and more skeptics these days. David Einhorn doesn't like it. Deutsche Bank doesn't like it. Michael Blair doesn't like it. I do like it...as a short candidate. Let's examine why.

Valuation

Symbol P/E Forward P/E PEG Ratio Price/Sales Price/Book
NFLX 314.34 118.77 6.4 5.81 18.34
AMZN 206.67 79.78 2.89 3.31 24.12
FB 61.61 25.69 0.92 16.88 7.4
GOOGL 31.37 20.12 1.3 6.84 4.37
CMCSA 19.75 17 1.46 2.09 2.99
CHTR 11.51 51.02 1.77 5.32 1.8

NFLX does not have a pure competitor that is publicly traded. However, when compared with Comcast (NASDAQ:CMCSA), Charter Communications (NASDAQ:CHTR) and the other three "FANG" stocks, it is obvious that NFLX is grossly overvalued. Simply put, the NFLX share price does not line up with the earnings it has historically produced. But perhaps NFLX can grow into these expectations? Let's explore next.

The Story

NFLX investors are likely prone to a recency bias. It is easy to consider the way that NFLX transformed the video content world and think it will continue to grow at light speed. However, the reality is that with success comes competition. Amazon Prime (NASDAQ:AMZN) and Hulu are nipping at Netflix's heels. NFLX cannot possibly continue on its current rate of growth and its already low margins will be forced lower. It would need to expand to every country on the planet to get anywhere close to its current valuation.

There also have been recent rumors regarding a potential buyout by Disney (NYSE:DIS) or Apple (NASDAQ:AAPL), which have boosted the stock price. Consider this fool's gold, much the same as the Twitter (NYSE:TWTR) rumors which prompted a 25% price increase and subsequent fall. It would not be rational for either of these companies to acquire NFLX at this stage as it would likely hurt subscriber growth among other things.

NFLX announces earnings on 10/17/16 after the bell. Over the past year, stock price reactions to earnings have become more and more negative. The most likely reason? Failure to live up to astronomical subscriber growth expectations. This quarter should be no different.

Market Environment

I recently wrote a piece (published 10/10/16) outlining volatility catalysts and the need for portfolio insurance in today's market. This is particularly evident as we just saw the market trade down over 200 points on the Dow today with no apparent news. In a bearish market, NFLX is a prime short candidate. It is included in both the SPY and QQQ ETFs and should closely track and/or magnify any market declines.

...And Chill

Sometimes less information is more. Don't worry about the subscriber numbers, revenue projections or cash flow. Just acknowledge that in a market of overvalued stocks, NFLX is one of the highest. When the market turns, those who are short the high flyers will be well rewarded. And even if the markets stay flat or drift higher, a well documented case can be made for a significantly lower valuation in NFLX.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in NFLX over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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